Paragon Electronics, Inc.: Inventory Cost Flow

6 Pages Posted: 21 Oct 2008

See all articles by Mark E. Haskins

Mark E. Haskins

University of Virginia - Darden School of Business

Monty Parker

affiliation not provided to SSRN

Abstract

This case provides the basis for exploring issues pertaining to different cost flow assumptions and their working capital consequences. Students make various cost flow calculations for inventory and cost of goods sold using FIFO, LIFO, and the weighted-average techniques over a five-year time frame, during which inventory prices and quantities rise and fall. It quickly becomes apparent that accounting choices are related to significant managerial concerns and that certain accounting choices often induce certain managerial actions.

Excerpt

UVA-C-1076

PARAGON ELECTRONICS, INC.:

INVENTORY COST FLOW

One of the first tasks Greg Lemond was assigned upon his new appointment as assistant controller of Paragon Electronics, Inc., involved a review of Paragon's accounting method for its inventories. A specific request made by Maria Sells, the controller, had been for Lemond to investigate the financial results of two different cost flow methods: last in, first out (LIFO) and weighted average. Currently, Paragon used the periodic first in, first out (FIFO) cost flow method. Lemond now contemplated what might be the most informative means of making the appropriate comparisons.

Paragon Electronics, Inc., was a small electronics firm, which specialized in the design and production of state-of-the-art electronic systems for advanced U.S. Department of Defense projects. Under one particular new project, Paragon had a contract to supply a package of subassemblies that were used by a much larger, primary contractor, Aero, Inc., in the production of a new guidance system. Aero, Inc., made all but a select few of the subassemblies used to build the completed guidance system. For those that it did not make, it had chosen a single-source supplier, Paragon, in order to minimize contracting and administrative costs. Paragon manufactured all of the subassemblies contracted to it by Aero, Inc., except the pulsed integrated gyro accelerometer (PIGA). Paragon had found that it would be possible to purchase the PIGA subassemblies from an outside source at a price roughly equivalent to what Paragon's production costs would be if it were manufactured in house. The option of purchasing the PIGAs allowed Paragon to (1) meet its component package contract with Aero, Inc., and (2) pursue other contract opportunities using the facilities that would otherwise have been used for the PIGA production.

. . .

Keywords: unit cost, cost flow, cost allocation, accounting methods, assets, balance sheet, working capital management

Suggested Citation

Haskins, Mark E. and Parker, Monty, Paragon Electronics, Inc.: Inventory Cost Flow. Darden Case No. UVA-C-1076, Available at SSRN: https://ssrn.com/abstract=1276572

Mark E. Haskins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924 -4826 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/haskins.htm

Monty Parker

affiliation not provided to SSRN

No Address Available

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