Using Financial Reports: Interpreting the Effect of a Change in Accounting for Production-Related Costs – Dana Holding Corporation designs and manufactures component parts for the vehicular, industrial, and mobile off-highway original equipment markets. In a recent annual report, Dana’s inventory note indicated the following:
Dana changed its method of accounting for inventories effective January 1 . . . to include in inventory certain production-related costs previously charged to expense. This change in accounting principle resulted in a better matching of costs against related revenues. The effect of this change in accounting increased inventories by $23.0 and net income by $12.9.
1. Under Dana’s previous accounting method, certain production costs were recognized as expenses on the income statement in the period they were incurred. When will they be recognized under the new accounting method?
2. Explain how including these costs in inventory increased both inventories and net income for the year.