Channel Stuffing & Carton Medical Devices

Channel Stuffing & Carton Medical Devices
Student’s Name
Institution
Channel Stuffing & Carton Medical Devices
Channel Stuffing
Question 1
Channel stuffing refers to a process in which a firm forces more products via the distribution channel that the current demand is leading to inflated sales volumes. The GAAP rules require that revenues should be stated in the financial statements only when they are earned (“Channel Stuffing”). Given that channel stuffing allows the retailer to have extra units that the current demand, the excess sale should not be recognized since there are high chances that it will be returned. If an organization acknowledges sales from its channel stuffing activities, this is regarded as a form of fraud since it is meant to overstate the revenues and the earnings. As a recommendation, firms should not engage in channel stuffing since it leads to an overstatement of revenues. However, if they have to do so, they have to justify that an anticipated demand will be sufficient to purchase all the products, which should be accompanied by the disclosure in the notes to the financial statements. Disclosure of channel stuffing in the noted to the financial report will enable the readers to understand the rationale behind high sales volumes of firms and insightful decisions.
Question 2
Channel stuffing can make the financial report to look healthy based on the reported revenues and earnings. As a result, it leads to ineffective decision making since the management views the earnings as accurate yet channel stuffing has caused them.

A scenario illustrating faulty internal decision based on channel stuffing is where a firm realizes that it made exceptionally high sales for its products which is interpreted as a rise in demand, without the realization the sales occurred under conditions of channel stuffing. As a result, the firm increases productivity to cater for the “rising demand” only to realize huge holding inventory due to the lack of demand in later periods that lead to losses.
Carton Medical Devices
Question 1
Based on the case study, Carton Medical Devices can use the standard cost system for inventory valuation as well as product costing by calculating the estimated costs of production. The company sets standards for measuring the consumption of labor, direct material and other related costs for each and comes with a cost estimate accurately. The product costs should reflect all the costs apportioned to it on the consumption of materials, labor among other relevant factors based on the set standards of allocating such costs (Needles, Powers & Crosson, 2013). On the other hand, standard costing of the inventories should take into account the costs of shipment or transportation, labor, warehousing, and others. These costs are allocated to the inventory based on the set standards of apportionment. The use of standard costing will enable the company to achieve efficiencies since the costs can be allocated quickly and accurately based on the actual consumption of resources and pre-determined standards. There is also an attainment of efficiency by eliminating irrelevant expenses which also helps to manage unfavorable variances.
Question 2
Carton’s standard costing system is achieved by applying the half standard costing system and the activity-based costing. However, there are concerns over inconsistencies in the use of each system resulting in varying cost estimates among the departments. The use of standard costing system by Carton for cost analysis will enhance consistency in costing since a similar strategy will be applied to the departments. The intelligence that the management of the company is likely to gain from the approach is that it will be enable to know which areas give rise to more costs that vary from the standards. This will be incorporated in cost analysis and decision making to minimize the expenses.
References
Channel Stuffing. Certified Financial Institute. https://corporatefinanceinstitute.com/resources/knowledge/strategy/channel-stuffing/Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.