Assignment 3: Calculating Inventory

Finlon Upholstery Inc. uses a job-order costing system to accumulate manufacturing costs. The company's work-in-process on December 31, 2001, consisted of one job (no. 2077), which was carried on the year-end balance sheet at $156,800. There was no finished-goods inventory on this date. Finlon applies manufacturing overhead to production on the basis of direct-labor cost. (The budgeted direct-labor cost is the company's practical capacity, in terms of direct-labor hours multiplied by the budgeted direct-labor rate.) Budgeted totals for 2002 for direct labor and manufacturing overhead are $4,200,000 and $5,460,000, respectively. Actual results for the year are as follows:

Actual Results Direct Materials Used Direct Labor Indirect Material Used Indirect Labor Factory Depreciation Factory Insurance Factory Utilities Selling and Administrative Expenses Total $5,600,000.00 $4,350,000.00 $65,000.00 $2,860,000.00 $1,740,000.00 $59,000.00 $830,000.00 $2,160,000.00 $17,664,000.00

Job no. 2077 was completed in January 2002, and there was no work in process at year-end. All jobs produced during 2002 were sold with the exception of Job no. 2143, which contained direct-material costs of $156,000 and direct-labor charges of $85,000. The company charges any under- or over-applied overhead to the cost of goods sold category. Using the above information, do the following:

Calculate the companys predetermined overhead application rate. Calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing overhead. Calculate the finished-goods inventory for the 12/31/01 balance sheet. Calculate the over-applied or under-applied overhead at year-end. Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.

Perform your calculations in an Excel spreadsheet and copy the calculations into a Word document. Write a 1-page paper in Word format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M1_A3.doc. For example, if your name is John Smith, your document will be named SmithJ_M1_A3.doc. By Wednesday, July 31, 2013, deliver your assignment to the M1: Assignment 3 Dropbox.

SOLUTION
1. Calculate the companys predetermined overhead application rate. Budgeted Manufacturing Overhead / Budgeted Direct Labor Cost $5,460,000 / $4,200,000 1.3 or 130% of Direct Labor Cost

Predetermine Overhead Application Rate (POR) =

2. Calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing overhead. Direct Labor * POR $4,350,000 * 1.3 $5,655,000 $5,600,000 $4,350,000 Manufacturing Overhead + Direct Material Used + Direct Labor $5,655,000 + $5,600,000 + $4,350,000 $15,605,000

Manufacturing Overhead =

Direct Material Used = Direct Labor =

Additions to the work-inprocess inventory =

3. Calculate the finished-goods inventory for the 12/31/01 balance sheet Direct Labor * POR $85,000 * 1.3 $110,500 $156,000 $85,000 Manufacturing Overhead + Direct Material Cost + Direct Labor Charges $110,500 + $156,000 + $85,000 $351,500

Manufacturing Overhead Cost =

Direct Material Cost = Direct Labor Charges =

Finished-goods inventory for the 12/31/01 balance sheet

4. Calculate the over-applied or under-applied overhead at year-end.

Actual Overhead =

Indirect Material Used + Indirect Labor + Factory Depreciation + Factory Insurance + Factory Utilities $65,000 + $2,860,000 + $1,740,000 +$59,000 + $830,000 $5,554,000 Direct Labor Cost * POR $4,350,000 * 1.3 $5,655,000 Applied Overhead - Actual Overhead $5,655,000 - $5,554,000 $101,000

Applied Overhead =

Over - Applied Overhead =

5. Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category The COGS is defined as all of the expenses / costs directly related to the creation of the goods or services that the organization sells. Some of the costs to be included in the COGS are cost of raw material, cost of running the production factory, cost of labor, etc. The S&A are related to the expenses incurred in attempting to create sales for the organization along the operating cost for the business. This includes sales and marketing expense, facility expense, legal and corporate expense, etc. Since the S&A are not directly linked to the cost incurred in producing the good or services (COGS), I believe they should not be included in the product cost. References: http://www.accountingtools.com/questions-and-answers/what-is-the-selling-general-andadministrative-expense.html http://news.morningstar.com/classroom2/course.asp?docId=145090&page=3&CN=