Monday, May 18, 2009

The Drive for Quality - The Impact on Accounting in the Wine Industry

In this paper we take an example of an industry, wine production, where in a number of countries there has been a movement towards expanding higher quality production. We report on interviews with wine producers in the US, Canada, Australia, New Zealand and Spain, and identify a variety of ways in which a more sophisticated approach to management accounting has become necessary as a result of the drive for quality.

Bloom et al (1994) have argued the vital role of the pursuit of quality in influencing management and accounting systems:

"The emphasis on quality involves co-operation, not only within a firm, but also with suppliers and customers. These concepts are associated with strategies such as Just-in-Time (JIT) manufacturing and with computer integrated manufacturing systems. All of these technological changes are based, for effectiveness, on concepts of continuous learning, team work, and flexibility.... No longer can accounting be considered a neutral and objective function independent of political power and social concerns. Nor can accounting possibly focus safely on functional tasks without addressing social and economic consequences of accounting standards. (p 44).

Accounting issues arising from the move to quality in the wine industry include:

1. Valuation problems of higher quality grapes.

2. Cost allocations between a wider range of products

3. Longer maturing periods give rise to questions of whether finance costs should be imputed to inventory, and also exacerbate the distortion of stock values arising from inflation.

4. Higher quality wine production involves using barrels of different costs and useful lives.

5. Higher quality wines call for more sophistication in price setting.

6. There is a danger that a tax regime that operates fairly for bulk low quality production will inadvertently discriminate against higher quality production.

The Accounting Problems

The question of what constitutes an equitable level of excise duty on wine has been extensively debated both in relation to the contrast between high quality and lower quality wines and in relation to the treatment of wine compared to other forms of alcohol. Our survey indicates that there is also an inconsistency in the impact of income taxes on the profits of higher quality as compared to lower quality wines. This arises because:

1. High quality wine is held in stock over periods so long that, even in times of low inflation, there is a material difference between the historic cost of wine sold and the replacement cost at the point of sale. To maintain the operating capability of the business it is necessary to replace stock at this higher current replacement cost, and since there is no tax relief on this necessary increased working capital requirement it must be met out of the after tax profit. Low quality wine production, with short stockholding periods, does not face this problem.

2. In most jurisdictions the tax authorities require that barrels be treated as a fixed asset and amortised for tax purposes over a standard prescribed asset life, either on a straight line or a reducing balance basis. For a high quality winemaker the barrel serves two purposes, in the first two or three years of use the oak supplying key elements of flavour to the wine and subsequently, when these are largely extracted, having a much lower value as a simple storage vessel. The tax system fails to allow for the heavy true depreciation of the barrels in those early years. Low quality producers buying cheap barrels, sometimes second-hand from high quality producers, use the barrel consistently for storage and so are more fairly treated by the tax system.

Download accounting journal paper: ziddu


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