Reclassifying Period Costs as Product Costs

A company’s product costs are the direct materials, and manufacturing overhead that are involved in acquiring or making products. Products costs are assigned to an inventory account on the balance sheet and considered to be assets. When the goods are sold, the costs are released from inventory and are recognized as expenses in the income statement. Period costs are all the costs that are not included in product cost, such as advertising, executive salaries, and other nonmanufacturing costs. These costs are expenses on the income statement in the period in which they are incurred, using the usual rules of accrual accounting. Reclassifying the period costs to product cost would greatly affect the income statement. The actual expense in the income statement will be understated. First of all, debiting period costs as product costs which is going to be charged over the next year is very risky. The product costs of next year are going to be higher than actual product costs. Since some planned maintenance and training are postponed, the company will face the pressure of expense increase. More than that, the cutting back on advertising will affect the company’s sales as well. If the sales amounts of next year were not quite high as expected, the company’s controller will have to find somewhere else in the accounting books to cover up the untrue numbers. It will consecutively cause more problems later on.
Today, as the business world becomes more competitive and complicates, executives or accountants of companies inevitably have to deal with challenging situations. I believe the situation for John Burke is hard, and it is natural for him to think over any possible way to overcome the situation. However, reclassifying the period costs to product costs is unethical and illegal. The Sarbanes-Oxley Act of 2002 requires that CEOs must certify the reliability and accuracy of corporate financial reports. If not, they will face possible jail time. More than that, according to the