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1. Why do you believe Polaris includes these costs in its cost of sales?

2. What effect does this cost accounting policy for its cost of sales have on Polaris' financial statements and any analysis of those statements? Explain.

3. Access Polaris' financial statements for the years after December 31, 2011, from its Website (Polaris.com) or the SEC's EDGAR Website (sec.gov). Review its footnote relating to Organization and Significant Accounting Policies. Has Polaris' changed its policy with respect to what costs are included in the cost of sales? Explain.


Polaris is the world's largest company that produces or manufactures snowmobiles, ATV and neighborhood vehicles. The company also manufactures motorcycles through their other subsidiaries and nowadays it manufactures them through Indian motorcycle. It's a global company that is committed to offer their customers with quality and competitive products around the world.

This is a case study that we are trying to analyze to see how costs associated withbuyer shipping, handling, warranty and depreciation affect the cost of goods soldof Polaris income statement. The impact that Polaris cost accounting policy will have towards its financial statements. Finally, we will look at how Polaris has been applying their cost accounting policies in the past years more especially in the year 2011's financial reports.

1. Why I belief Polaris Inc includes this costs to cost of goods sold

Cost of goods sold is the measure of the amount of cash the company uses to manufacture goods or offering a service which is sold by this company. This includes expenses used directly in the manufacturing process such as materials used directly in the production, directly used labour and utilities such as shipment and usage expenses the customer incurred.

Shipping and handling costs

This kind of cost is reported in Polaris income statement and therefore is considered an expense. These are costs that are directly incurred by the company in the process of acquiring manufacturing materials that will be used to manufacture the finished goods. Also, the cost that are associated with the handling of these materials all the way until They are added to the cost of finished goods at the beginning of the period and the cost that is used to buy additional inventory during that same period and then less expenses used for finished goods at the end of the period.

These costs are sometimes considered inventorial or an expense depending on what activity is associated with that inventory. They are incurred along in the movement of purchase of materials, the process of production and as well as stoking of the finished goods. Shipping maybe incur during product selling of which they can also be included in the cost of goods sold, but may not be included in the inventory price and can be a sales expense as well on the other hand.

This will yield the total cost of goods sold for the period specified. At the end of the day, this cost is included in the production cost, which makes or adds up to the finished goods of the cost of goods sold in their financial period. It's not an exceptional cost as far as production or manufacturing process is a concern, but must be added to the cost of sales in the determination of gross margins as well as net profit.

Warranty Expense

This is a window that the company allows their customers to return, repair, exchange or replace their goods in case of any challenges they come across while using the good from the time of purchase. The window period is usually six to twenty-four months. This is a cost that the company incurs for the repairs of the goods they sold to their customers or expects to incur in future in case the goods sold to their customers may have some mechanical problems and call for or requires the company to repair them or replace the goods. The total cost of warranty amount is usually limited or tied up to typically the period the company allows to repair or replace and is counted in the cost of goods soldthen they are part and partially of the production process. Eventually, this cost is involved in the manufacturing price which makes or adds up to the finished goods of the cost of goods sold for their financial period. It's not an exceptional cost as far as production or manufacturing process is a concern, but must be added to the cost of sales in the determination of gross margins as well as net profit.

Depreciation Cost

This is a cost that is being charged to machinery that is used in the manufacturing process to produce finished goods through a financial period that is charged by the company. This amount is usually theoretical which intends to reflect up to date the total consumption of the machine or asset being used in manufacturing. It is then considered a direct cost to the production process and it varies according to the changes that are related to manufacturing activities or products. It is the responsibility of the turbine in the generation of the cost centre and therefore it's a direct cost that is associated with the manufacturing and affects the production cost which finally added to finished goods in the income statement. It affects both opening inventories, finished good produced during the period and closing inventory at the end of the financial year. Eventually, it is a manufacturing cost which makes or must be added towards the finished goods of the cost of goods sold in their financial period. It's therefore not an exceptional cost as far as production or manufacturing process is a concern, but must be added to the cost of goods to ascertain the gross margins as well as net profit.

Therefore, shipment and holding expenses, warranty costs and depreciation expenses are finally calculated outside the cost of sales before they are matched to the cost of sales. They are part and partially of the manufacturing process which must be accounted for during the period they were incurred. The company ensures that all the costs that pertain to producing a product as a finished good at the end of the period are properly recorded and assigned properly to their respective cost centers.

2. The effects that cost accounting policy for its cost of sales have on Polaris financial statements and analysis of those statements.

The effect of cost accounting policy is that, it rises Polaris cost of sales and reduces the gross profit margin and ultimately affects the net profit entirely. It all depends on how the company places its policies which may have a positive or negative impact to their income statement.

The policy puts the company in a very difficult position to compare itself with their competitors in the market unless or otherwise, they are using the same policy in order to compare itself fully in the competitive market environment.

What Polaris as a company is trying to do is that to get or identify all costs which are related to the product sales. Since it's a good tactic to assigning the potential costs from the onset point of view, it will definitely affect the comparison of their financial statements and in fact, it will ultimately bury their unique costs towards the generation of cost of sales in the income statement.

Therefore, Polaris cost accounting policy should be favorable so that it can make it easier for the company to compare itself with other emerging competitors in the market.

3. Reviewing Polaris' footnote regarding to changes of its cost accounting policy.
After going through a thorough the Polaris financial statements of the year 2011 and reviewing thefootnotesthat are relating to cost accounting policies, it seems like the company has not changed the policyin relation to shipping and handling costs, as well as warranty costs. Customers who are attributed this cost particularlyshipment and usagecomprises cost of goods sold while those costs that may not be directly associated to cost of sales will be charged to as administrative expenses which ultimately affect the net profit of the company at the end of the financial period.

The company is still continuing to assess its warranty cost of their products at every time they recognize their revenues. Their assessment is in the basis of historical experience and it reflects what they intend to see in the future as a return from their customers for an exchange or replacement or repair costs. May be the company has some intentions in future to revise its policies estimates will in cure it in their future reporting financial period to reflect this. For now, as my analysis is concern, I have not seen any change in their policies, they still remain the same as it were from previous or past years.

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