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We have a flat-rate warranty program, in which we credit some customers on the invoice a flat rate for warranty expense, based upon the number of units they purchase. For this fee, they handle all the warranty work. If the actual costs exceed the flat rate, they can come back to the company for reimbursement of the incremental costs. We presently account for the flat-rate program as a selling expense, along with the non-flat-rate warranty costs.
The auditors have challenged us on the accounting, suggesting the costs should be considered an allowance or reduction in sales, since it is based on volume and included on the invoice. I'm interested to know how companies who have similar flat-rate warranty programs account for it. More importantly, if it is accounted for as a selling expense, is the program structured in a particular way, one that would support treating it as selling costs?
Anonymous
Response:
We have similar warranty programs in the food industry for product spoils, and I have always seen it handled as a reduction of sales.
Tim Andersen (tandersen@banddfoods.net )
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