Control equation warranty easily

Aug 6th, 2022
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How to control equation warranty

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To calculate the warranty expense, first figure out how many products will need repair or replacement: Total number of units sold X Percentage of units that are defective. Units needing repair or replacement X cost per unit to repair or replace. 14 water bottles x $4 per water bottle = $56 cost of inventory.
Use the following steps as a guide to account for warranty expenses: Find the total number of products sold. Determine the percentage of defective products. Calculate the number of products needing replacement. Evaluate the cost of product replacement. Estimate the total warranty expense.
To calculate the warranty expense, first figure out how many products will need repair or replacement: Total number of units sold X Percentage of units that are defective. Units needing repair or replacement X cost per unit to repair or replace. 14 water bottles x $4 per water bottle = $56 cost of inventory.
Example of a Warranty Liability ABC Company sells blue widgets. It has historically experienced a warranty expense of 0.1% of sales. In the current period, it sold $500,000 of blue widgets, so it records a debit of $500 to the warranty expense account and $500 to the warranty liability account.
Apply the percentage to your sales forecast for the upcoming period. For example, suppose you project $100,000 in sales for the next quarter. If you estimate that 1 percent of revenues will pay for warranty costs, multiply $100,000 by 0.01 to find the warranty liability of $1,000.
Therefore, a company must record in the period of the sale the estimated cost of repairing or replacing the product during the warranty period. That expected cost is recorded as a liability on its balance sheet and as an expense on its income statement.
An extended warranty price represents a percentage of the total product cost. As a general rule of thumb, you shouldnt spend more than 30% of the product cost on a product warranty.
The costs associated with a manufacturers product warranty are part of its selling expenses and therefore part of its SGA expenses. If the future costs of the warranty coverage are probable and can be estimated, they are recorded at the time of the sale.
Expense Warranty (Accrual) approach if the warranty is inseparable from the product being sold and warranty costs are probable and can be reasonably estimated, accrue these costs as a liability in the year of sale.
A warranty is a promise to your customers that you want a long-term relationship with them. It is an assurance that you stand behind your product quality and want the product to be used for a long time.

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