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Abstract
This paper is the case study of Polaris Industries Inc, a Minnesota based auto industry from
USA. They are US based manufacturer of automobiles that are used in different terrains and
land structures ranging from SUVs, Cars to Snow Mobiles. This paper seeks to understand
the warranty structure of these automobiles. It includes about the warranty service as a cost
for company and how company accounts it in their books including various factors that
Polaris, which is an auto manufacturing company has a lot of products in its lineup
from SEVs, Off road vehicles, Snowmobiles, and on-road vehicles like motorcycles and
more. These products are sold worldwide through dealers, distribution networks and
channels. Customers buying these vehicles obviously get some form of warranty for buying
these products from the company. These warranties cover after services, repairs and
maintenance for a certain period of time. The company of this kind almost always makes
estimates about the costs of the warranty service based on their past records, experience along
with future conditions (Murthy, 2007). They are called warranty reserve and are recorded as
Going through the annual report of Polaris Industries Inc. ending Dec 31, 2011, we
could find out that the company has different products in its catalog. And each of these
products have different warranty period for different products. For instance, ORV or Off
Road Vehicles have the warranty period of six months. Snowmobiles similarly have one year
warranty period. And, as we move more towards on road products, they have more
warranty period. Motorcycles have one-year warranty period. SEVs or Small Electric
But again, as mentioned in the report, Polaris warranty period will also differ
according to the geographical locations. Some locations will have longer warranty period
depending upon the local regulations, their market situations, sometimes even as a part of
their promotion campaign. And like any manufacturing company, they are required to repair
For Polaris industries, warranty reserve is established when their product is sold
through dealers, distributors and other networks. At this point, management makes the best
estimates based on the past trends and rates. They record the amount in balance sheet until
they are finally paid off. If we look at the actual balance sheet in Dec 31, 2011, the accrued
warranty liability was recorded 44.4 million dollars and 32.7 million dollars for 2010
(POLARIS, 2012).
And when the customers finally order their claims, they will know more and more
about the estimates and the actual cost. That is when they make adjustments. They make
adjustments to their estimates from time to time as they find more about the customers
warranty claims.
In consideration with the warranty reserve estimation, it is assumed that the warranty
for ascertain product sold in a period is exercised within a certain consecutive period. But this
may not be always so. For instance, the customer might not prefer the brand or the product so
might decide to move on to another product. Other cases like loss (Mitra & Patankar, 1988)
of warranty card, customers relocation and other factors can also dissuade the customer from
using their warranty card. Because of these cases, the warranty reserve estimates may be
In reverse, I think the changes will be opposite when a certain batch or certain
products sold in a period to the customer is more prone to damage (Wild, Shaw, & Chiapetta,
2013). In addition, some customers may exercise their warranty claims more often than
others. If this number increases, then the actual cost for warranty may go beyond what the
company estimates.
POLARIS INDUSTRIES: PRODUCT WARRANTIES 4
But as Wallace Blischke (1995) mentions in his book, more often than not, the
chances of warranty execution is dependent on the consumer behavior and rather than
assumption that all customers will exercise warranty in case of product failure.
In a nutshell, the changes in estimates will either reduce the cost or expenses or increase it. It
will affect the ratio of expenses incurred to revenue generated. So, when more warranty
claims are presented for a time, it means more expenses for customers and after sales service.
This is directly a companys expenses and will affect the revenue they have generated for the
both customer and the company. One of the key responsibilities of management accountants
is to assist in financial reporting, and help the company in devising plans and making
decision. The management accountants are in fact involved with the product as early as
product development itself (Hertenstein & Platt, 1998). This is because, they play crucial role
For determining the estimates for warranty reserve, the management accountants can
help devise plans and help make decisions for the company by evaluating the possible cost
for repair and maintenance for the specific time. With the help of management accountants,
the company can effectively calculate how much the cost will eventually add up for the sales
of product. This estimation will help company reduce cost and eventually reduce price for
consumers.
price and keep it in their reach. And increase profit to cost ratio i.e. try and maximize
As per Polaris annual report, ending Dec 31, factors that would affect the warranty
accrual of Polaris Industries Inc. are: improvement in the manufacturing quality, shifts in
product mix, changes in warranty coverage periods, and product recalls and any significant
changes in sales volume and snowfall and its impact on snowmobile usage (POLARIS,
2012).
affect the product and minimize warranty costs that companies may possibly incur.
For instance, fewer customers coming to claim their warranty mean less expense on
the companys side. The expense to revenue ratio will favor company. This will give
more flexibility to the company for focusing on other business units like product
development.
II. Shift in product mix: Shift in product mix or adding or dropping of different
products in the companys catalog will also affect the warranty accrual (Srinivasan,
2016). Increase in new products will add need for company to provide additional
warranty benefits to the customers, more than what they already have been providing.
The case is vice versa when the company decides to drop a product. They will have
less warranty accruals to care about. But along with this, company also may lose
sales.
III. Change in warranty coverage period: Change in coverage period is another factor
that will increase warranty accruals. Things like extended warranty, especially in
POLARIS INDUSTRIES: PRODUCT WARRANTIES 6
cases like products with manufacturing defects and others will result in additional
IV. Snowfall and its impact on snowmobile usage: Some products are seasonal, like
snow mobile. At the time of winter the demand of the product is heavy. And with the
extremity of the climate, the usage will also result in increasing warranty claims.
Although increase in seasonal sales may boost company sales, impact of extreme
snow fall may potentially affect the warranty accruals of the company.
V. Product recalls and any significant changes in sales volume: Finally, as it came up
defects; those may require special attention like extended warranty. And more simply,
changes in sales of the product are obviously will affect the warranty accruals as more
accountants job. They are involved in making decisions and devising plans for reducing
costs. And as discussed just above various things may affect the warranty of the product.
Management accountants are thus involved in maintains minimal cost to increase the reach of
References
Blischke, W. (1995). Product Warranty Handbook. NY: CRC press.
Hertenstein, J. H., & Platt, M. B. (1998). Why product development teams need management
Mitra, A., & Patankar, J. G. (1988). Warranty cost estimation: a goal programming approach.
Murthy, D. (2007). Product reliability and warranty: an overview and future research. 17 (3).
POLARIS. (2012). Polaris Industries Inc, Annual Report 2011. USA: Polaris Industries Inc.
Srinivasan, S. (2016, March 21). What is product line, product mix? Retrieved from
Wild, J., Shaw, K., & Chiapetta, B. (2013). Fundamentals of Accounting Principles. New