Calculating Inventory

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M1A3 Example

Module 1 Assignment 3
Solution:
1 Calculate the company's predetermined overhead application rate.
Predetermined overhead rate = budgeted overhead divided by direct-labor cost
budgeted mfg o/h budgeted direct labor POHR
$ 4,541,000.00 $ 3,670,000.00 124% of direct labor cost
2 Calculate the additions to the work-in-process inventory account for the direct materials used,
direct labor, and manufacturing overhead.
Numbers changed from the original for this example. Additions (debits) to WIP inventory account
Actual Results Direct Materials Used $ 4,560,000.00
Direct Materials Used $ 4,560,000.00 Direct Labor $ 4,097,500.00
Direct Labor $ 4,097,500.00 Mfg O/H DL X POHR $ 5,069,958.45
Indirect Materials Used $ 65,250.00 $ 13,727,458.45
Indirect Labor $ 2,531,000.00
Factory Depreciation $ 1,579,000.00 3 Calculate the finished-goods inventory for the 12/31/02 balance sheet.
Factory Insurance $ 60,150.00
Factory Utilities $ 805,500.00 The finished goods inventory consisted of Job # 2143 Account Debit Credit
Selling and Administrative Expenses $ 1,936,000.00 Job # 2143 Direct Material Costs $ 142,600.00 Finished goods inventory $ 13,870,738.45
Total $ 15,634,400.00 Job # 2143 Direct Labor Charges $ 62,250.00 Work in process inventory $ 13,870,738.45
Job # 2153 Mfg O/H (Dl X POHR%) $ 77,023.77
Job # 2143 Finished Goods Inventory $ 281,873.77
Beginning WIP inventory 2002 (Job # 2077) $ 143,280.00 Since there is no work in process at year-end, all amounts in the work in process account
2002 budgeted direct-labor $ 3,670,000.00 must be transferred to finished goods inventory. Thus:
2002 budgeted mfg o/h $ 4,541,000.00
Beginning balance in Work in process $ 143,280.00
Job # 2077 was completed in 2002 and sold Additions to the work in process account $ 13,727,458.45
All jobs produced in 2002 were sold except for Job # 2143 Work in process inventory $ 13,870,738.45
Job # 2143 direct-material costs $ 142,600.00
Job # 2143 direct-labor charges $ 62,250.00 Finished goods inventory (no WIP) $ 13,870,738.45
4 Calculate the over-applied or under-applied overhead at year-end.
Finlon's applied overhead totals 123.732970027248% of direct labor cost, or 5069958.44686648. Actual overhead was as follows.
Indirect materials used $ 65,250.00 Account Debit Credit
Indirect labor $ 2,531,000.00 Manufacturing overhead $ 29,058.45
Factory depreciation $ 1,579,000.00 Cost of goods sold $ 29,058.45
Factory insurance $ 60,150.00
Factory utilities $ 805,500.00
Total $ 5,040,900.00
The applied mfg o/h $ 5,069,958.45
Actual overhead $ 5,040,900.00
Difference $ 29,058.45
Because the applied o/h was larger than the actual, the result is over applied overhead.
Manufacturing o/h has a credit balance, which needs to be removed. A debit is made
for the amount of the over applied. Since cost of goods sold was overstated by the
amount of the over applied overhead, the cost of goods sold account needs to be
credited by the over applied amount.
5 Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.
The company's cost of goods sold is calculated as follows:
Finished goods inventory, Jan 1 0
Add: Cost of goods manufactured $ 13,870,738.45
Cost of goods available for sale $ 13,870,738.45
Less: Finished goods inventory, Dec 31 $ 281,873.77
Unadjusted cost of goods sold $ 13,588,864.67
Less: Over applied overhead $ 29,058.45
Cost of goods sold $ 13,559,806.23
Therefore, it is not appropriate to include selling and administrative expenses in the cost of goods sold category.
Selling and administrtative expenses are operating expenses of the firm and are treated as period costs. Such costs
are unrelated to manufacturing overhead and cost of goods sold.

M1A3 Blank

Module 1 Assignment 3
Solution:
1 Calculate the company's predetermined overhead application rate.
Predetermined overhead rate = budgeted overhead divided by direct-labor cost
budgeted mfg o/h budgeted direct labor POHR
$ - 0 $ - 0 ERROR:#DIV/0! of direct labor cost
2 Calculate the additions to the work-in-process inventory account for the direct materials used,
direct labor, and manufacturing overhead.
Additions (debits) to WIP inventory account
Actual Results Direct Materials Used $ - 0
Direct Materials Used $ - 0 Direct Labor $ - 0
Direct Labor $ - 0 Mfg O/H DL X POHR ERROR:#DIV/0!
Indirect Materials Used $ - 0 ERROR:#DIV/0!
Indirect Labor $ - 0
Factory Depreciation $ - 0 3 Calculate the finished-goods inventory for the 12/31/02 balance sheet.
Factory Insurance $ - 0
Factory Utilities $ - 0 The finished goods inventory consisted of Job # 2143 Account Debit Credit
Selling and Administrative Expenses $ - 0 Job # 2143 Direct Material Costs $ - 0 Finished goods inventory ERROR:#DIV/0!
Total $ - 0 Job # 2143 Direct Labor Charges $ - 0 Work in process inventory ERROR:#DIV/0!
Job # 2153 Mfg O/H (Dl X POHR%) ERROR:#DIV/0!
Job # 2143 Finished Goods Inventory ERROR:#DIV/0!
Beginning WIP inventory 2002 (Job # 2077) $ - 0 Since there is no work in process at year-end, all amounts in the work in process account
2002 budgeted direct-labor $ - 0 must be transferred to finished goods inventory. Thus:
2002 budgeted mfg o/h $ - 0
Beginning balance in Work in process $ - 0
Job # 2077 was completed in 2002 and sold Additions to the work in process account ERROR:#DIV/0!
All jobs produced in 2002 were sold except for Job # 2143 Work in process inventory ERROR:#DIV/0!
Job # 2143 direct-material costs $ - 0
Job # 2143 direct-labor charges $ - 0 Finished goods inventory (no WIP) ERROR:#DIV/0!
4 Calculate the over-applied or under-applied overhead at year-end.
ERROR:#DIV/0!
Indirect materials used $ - 0 Account Debit Credit
Indirect labor $ - 0 Manufacturing overhead ERROR:#DIV/0!
Factory depreciation $ - 0 Cost of goods sold ERROR:#DIV/0!
Factory insurance $ - 0
Factory utilities $ - 0
Total $ - 0
The applied mfg o/h ERROR:#DIV/0!
Actual overhead $ - 0
Difference ERROR:#DIV/0!
Because the applied o/h was larger than the actual, the result is over applied overhead.
Manufacturing o/h has a credit balance, which needs to be removed. A debit is made
for the amount of the over applied. Since cost of goods sold was overstated by the
amount of the over applied overhead, the cost of goods sold account needs to be
credited by the over applied amount.
5 Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.
The company's cost of goods sold is calculated as follows:
Finished goods inventory, Jan 1 0
Add: Cost of goods manufactured ERROR:#DIV/0!
Cost of goods available for sale ERROR:#DIV/0!
Less: Finished goods inventory, Dec 31 ERROR:#DIV/0!
Unadjusted cost of goods sold ERROR:#DIV/0!
Less: Over applied overhead ERROR:#DIV/0!
Cost of goods sold ERROR:#DIV/0!
Therefore, it is not appropriate to include selling and administrative expenses in the cost of goods sold category.
Selling and administrtative expenses are operating expenses of the firm and are treated as period costs. Such costs
are unrelated to manufacturing overhead and cost of goods sold.

M1A3

Module 1 Assignment 3
Solution:
1 Calculate the company's predetermined overhead application rate.
Predetermined overhead rate = budgeted overhead divided by direct-labor cost
budgeted mfg o/h budgeted direct labor POHR
$ 5,460,000.00 $ 4,200,000.00 130% of direct labor cost
2 Calculate the additions to the work-in-process inventory account for the direct materials used,
direct labor, and manufacturing overhead.
Additions (debits) to WIP inventory account
Actual Results Direct Materials Used $ 5,600,000.00
Direct Materials Used $ 5,600,000.00 Direct Labor $ 4,350,000.00
Direct Labor $ 4,350,000.00 Mfg O/H DL X POHR $ 5,655,000.00
Indirect Materials Used $ 65,000.00 $ 15,605,000.00
Indirect Labor $ 2,860,000.00
Factory Depreciation $ 1,740,000.00 3 Calculate the finished-goods inventory for the 12/31/02 balance sheet.
Factory Insurance $ 59,000.00
Factory Utilities $ 830,000.00 The finished goods inventory consisted of Job # 2143 Account Debit Credit
Selling and Administrative Expenses $ 2,160,000.00 Job # 2143 Direct Material Costs $ 156,000.00 Finished goods inventory $ 15,761,800.00
Total $ 17,664,000.00 Job # 2143 Direct Labor Charges $ 85,000.00 Work in process inventory $ 15,761,800.00
Job # 2153 Mfg O/H (Dl X POHR%) $ 110,500.00
Job # 2143 Finished Goods Inventory $ 351,500.00
Beginning WIP inventory 2002 (Job # 2077) $ 156,800.00 Since there is no work in process at year-end, all amounts in the work in process account
2002 budgeted direct-labor $ 4,200,000.00 must be transferred to finished goods inventory. Thus:
2002 budgeted mfg o/h $ 5,460,000.00
Beginning balance in Work in process $ 156,800.00
Job # 2077 was completed in 2002 and sold Additions to the work in process account $ 15,605,000.00
All jobs produced in 2002 were sold except for Job # 2143 Work in process inventory $ 15,761,800.00
Job # 2143 direct-material costs $ 156,000.00
Job # 2143 direct-labor charges $ 85,000.00 Finished goods inventory (no WIP) $ 15,761,800.00
4 Calculate the over-applied or under-applied overhead at year-end.
Finlon's applied overhead totals 130% of direct labor cost, or 5655000. Actual overhead was as follows.
Indirect materials used $ 65,000.00 Account Debit Credit
Indirect labor $ 2,860,000.00 Manufacturing overhead $ 101,000.00
Factory depreciation $ 1,740,000.00 Cost of goods sold $ 101,000.00
Factory insurance $ 59,000.00
Factory utilities $ 830,000.00
Total $ 5,554,000.00
The applied mfg o/h $ 5,655,000.00
Actual overhead $ 5,554,000.00
Difference $ 101,000.00
Because the applied o/h was larger than the actual, the result is over applied overhead.
Manufacturing o/h has a credit balance, which needs to be removed. A debit is made
for the amount of the over applied. Since cost of goods sold was overstated by the
amount of the over applied overhead, the cost of goods sold account needs to be
credited by the over applied amount.
5 Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.
The company's cost of goods sold is calculated as follows:
Finished goods inventory, Jan 1 0
Add: Cost of goods manufactured $ 15,761,800.00
Cost of goods available for sale $ 15,761,800.00
Less: Finished goods inventory, Dec 31 $ 351,500.00
Unadjusted cost of goods sold $ 15,410,300.00
Less: Over applied overhead $ 101,000.00
Cost of goods sold $ 15,309,300.00
Therefore, it is not appropriate to include selling and administrative expenses in the cost of goods sold category.
Selling and administrtative expenses are operating expenses of the firm and are treated as period costs. Such costs
are unrelated to manufacturing overhead and cost of goods sold.