product warranty

(noun)

In retail, a guarantee of the reliability of a product under conditions of ordinary use; should the product malfunction within a stipulated amount of time after the purchase, the manufacturer or distributor is typically required to provide the customer with a replacement, repair, or refund.

Related Terms

Examples of product warranty in the following topics:

  • Reporting Contingencies

    • For example, to accrue a provision for product warranty costs, assume that minor repairs cost 5% of the total product sales and an estimated 5% of products may require minor repairs within 1 year of sale.
    • The provision is calculated by multiplying 5% of total product cost by 5% of products needing minor repair and then adding 20% of cost for major repair, multiplied by 1% of products needing major repair.
    • A warranty expense is debited for the provision amount that will offset product sales revenue in the income statement and a credit is posted to warranty provision liability.
    • As the warranty claims are made, the liability account is debited and cash is credited for the cost of the repair.
    • The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.

  • Classifying Liabilities

    • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

  • Components of Inventory Cost

    • The cost of goods produced in the business should include all costs of production: parts, labor, and overhead.
    • The cost of goods produced in the business should include all costs of production.
    • Indirect labor costs are the wages paid to other factory employees involved in production.
    • Variable production overheads are allocated to units produced based on actual use of production facilities.
    • Fixed production overheads are often allocated based on normal capacities or expected production.

  • Reporting R&D Cost

    • Development is the application of research findings to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use.
    • It should be emphasized that R&D activities do not include routine or periodic alternatives to existing products, production lines, manufacturing processes, and other ongoing operations even though these alterations may represent improvements.
    • For example, routine ongoing efforts to refine, enrich, or improve the qualities of an existing product are not considered R&D activities.

  • Recognition of Revenue Prior to Delivery

    • Completion of production method: This method allows recognizing revenues even if no sale was made.
    • This applies to agricultural products and minerals because there is a ready market for these products with reasonably assured prices, the units are interchangeable, and selling and distributing does not involve significant costs.
    • All expected revenues and costs of production related to the units produced will be reported on the income statement.
    • Distinguish between the percentage of completion method and the completion of production method of revenue recognition

  • Franchises and Licenses

    • Franchises and licenses are intangible assets that legally entitle a business to sell a product or service developed by another entity.
    • A franchise is a contract that grants a business the right to operate using the name and products of an established brand.
    • A franchisor will develop the brand, produce goods and develop marketing campaigns for its products.
    • This license will contain terms that will define how the purchaser can use the product and whether she can share it.
    • The useful life of a license is how long it grants the holder the exclusive right to use the underlying product.

  • What Is R&D?

    • The primary function of R&D is to develop new products or discover and create new knowledge about scientific and technological topics.
    • New product design and development is more often than not a crucial factor in the survival of a company.
    • In an industry that is changing fast, firms must continually revise their design and range of products.
    • Gross profits will be as much as 90% of the sales cost, with manufacturing costing only 10% of the product price, because so many individual projects yield no exploitable product.
    • Other companies capitalized those costs that related to proven products and expensed the rest as incurred.

  • Unearned and Deferred Revenues

    • A deferred revenue is recognized when cash is received upfront for a product before delivery or for a service before rendering.
    • A deferred revenue is specifically recognized when cash is received upfront for a product before delivery or for a service before rendering.
    • In these cases, the earnings process is not complete when the cash is received, so the cash is recorded as a liability for the products or services that are due to the buyer .

  • Additional Factors to Consider

    • For example: the company's relative size compared with other businesses in its industry, relative product or service quality, product or service differentiation from others in the industry, market strengths, market size and share, competitiveness within its industry in terms of price and reputation, and copyright or patent protection.
    • The company's relative size compared with other businesses in its industry, relative product or service quality, product or service differentiation from others in the industry, market strengths, market size and share, competitiveness within its industry in terms of price and reputation, and copyright or patent protection of its products are all important in this examination.
    • The most narrow form is direct competition (also called "category competition" or "brand competition"), where products which perform the same function compete against each other.
    • Sometimes, two companies are rivals, and one adds new products to their line, which leads to the other company distributing the same new things, and in this manner they compete.
    • The next form is substitute or indirect competition, where products which are close substitutes for one another compete.

  • Methods of Depreciation

    • Some of the most common methods used to calculate depreciation are straight-line, units-of-production, sum-of-years digits, and double-declining balance, an accelerated depreciation method.
    • The units-of-production depreciation method assigns an equal amount of expense to each unit produced or service rendered by the asset.
    • This method is typically applied to assets used in the production line.
    • The depreciation expense for the period is the per unit amount multiplied by the period's production amount -- if 1,000 units were produced, depreciation expense equals USD 6,000 (1,000 * 6).
    • Differentiate between the straight-line, units of production, sum of the years digits and double declining methods of calculating depreciation