POLARIS INDUSTRIES: PRODUCT WARRANTIES 1

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

brings change in them.

POLARIS INDUSTRIES: PRODUCT WARRANTIES 2

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

liability on the balance sheet (Elmaleh, 2007).

Polaris Industries Inc.: Product Warranty and Warranty Reserve

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

vehicles have two years of warranty (POLARIS, 2012).

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

or replace the defected parts in their products complained by their customer/owners.

POLARIS INDUSTRIES: PRODUCT WARRANTIES 3

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.

Effect of changes in estimates:

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

much higher than what might actually be the cost.

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

time. In a different situation, the case is reverse.

Role of Management Accountants

The role of management accountants in determining these estimates is very crucial to

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

in estimation of the cost associated with the product.

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.

In other words, Management accounts, help customers by providing products in less

price and keep it in their reach. And increase profit to cost ratio i.e. try and maximize

optimum profit with less cost for the company.

POLARIS INDUSTRIES: PRODUCT WARRANTIES 5

Factors Affecting Warranty Accrual

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).

I. Improvement in the manufacturing quality: Manufacturing quality certainly does

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

warranty expenses to the customers.

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

in preceding paragraphs, some batch of production may experience manufacturing

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

sales means, more possibility of increased warranty claims.

To sum up all, warranty estimates are an essential part of the management

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

the product to general consumers.

POLARIS INDUSTRIES: PRODUCT WARRANTIES 7

References
Blischke, W. (1995). Product Warranty Handbook. NY: CRC press.

Elmaleh, M. S. (2007). Accounting for Product Warranties.

Hertenstein, J. H., & Platt, M. B. (1998). Why product development teams need management

accountants. Management Accounting , 50 - 55.

Mitra, A., & Patankar, J. G. (1988). Warranty cost estimation: a goal programming approach.

Decision Sciences , 19 (2), 409-423.

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

Senthilnathan Website: LinkedIn

Wild, J., Shaw, K., & Chiapetta, B. (2013). Fundamentals of Accounting Principles. New

York: McGraw Hill.