Assignment 3: Calculating Inventory For Finlon Upholstery In

Assignment 3 Calculating Inventoryfinlon Upholstery Inc Uses A Job O

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, carried on the year-end balance sheet at $156,800, with no finished-goods inventory on this date. The company applies manufacturing overhead based on direct-labor cost, with budgeted totals for 2002 of $4,200,000 for direct labor and $5,460,000 for manufacturing overhead. Actual results for the year include direct materials used totaling $5,600,000; direct labor costing $4,350,000; indirect material used of $65,000; indirect labor of $2,860,000; factory depreciation of $1,740,000; factory insurance of $59,000; factory utilities of $830,000; and selling and administrative expenses of $2,160,000, summing to $17,664,000 in total expenses.

Job no. 2077 was completed in January 2002, with no work in process at year-end. All jobs produced during 2002 were sold except for Job no. 2143, which had direct-material costs of $156,000 and direct-labor charges of $85,000. The company allocates any under- or over-applied overhead to the cost of goods sold. Using this information, calculate:

  1. The company's predetermined overhead application rate.
  2. The additions to the work-in-process inventory account for direct materials used, direct labor, and manufacturing overhead.
  3. The finished-goods inventory as of 12/31/02.
  4. The over-applied or under-applied overhead at year-end.
  5. Whether it is appropriate to include selling and administrative expenses in the cost of goods sold.

Paper For Above instruction

The following analysis comprehensively addresses the financial calculations and conceptual considerations based on the provided data for Finlon Upholstery Inc. for the year 2002. Emphasis is placed on the application of cost accounting principles, including determination of overhead rate, inventory valuation, and considerations regarding expense classification.

Calculation of Predetermined Overhead Application Rate

The predetermined overhead application rate is established prior to the period and is based on estimated costs to facilitate cost allocation during the year. It is calculated as:

Predetermined Overhead Rate = Budgeted Manufacturing Overhead / Budgeted Direct Labor Cost

Given the budgeted totals:

  • Manufacturing Overhead = $5,460,000
  • Direct Labor = $4,200,000

Thus:

Predetermined Overhead Rate = $5,460,000 / $4,200,000 = 1.3 or 130%

This rate implies that for every dollar of direct labor, $1.30 of manufacturing overhead is applied.

Calculations for Additions to Work-in-Process Inventory

To determine the additions, we follow standard manufacturing cost accumulation procedures:

  • Direct Materials Used: $5,600,000 (given)
  • Direct Labor: $4,350,000 (given)
  • Manufacturing Overhead: Calculated as: 
    $4,350,000 (Direct Labor) × 130% = $4,350,000 × 1.3 = $5,655,000

Hence, the total manufacturing costs added to work-in-process during 2002 are:

$5,600,000 + $4,350,000 + $5,655,000 = $15,605,000

These costs represent the sum of direct materials, direct labor, and applied manufacturing overhead.

Calculation of Finished-Goods Inventory on 12/31/02

During 2002, Job no. 2077 was completed, and all manufactured jobs, except Job no. 2143, were sold. Since Job no. 2143 was not sold by year-end and work in process was zero, the ending finished-goods inventory comprises only Job no. 2143.

Direct-material costs for Job no. 2143: $156,000

Direct-labor costs for Job no. 2143: $85,000

Manufacturing overhead applied:

$85,000 (Direct Labor) × 130% = $85,000 × 1.3 = $110,500

Total cost of Job no. 2143:

$156,000 + $85,000 + $110,500 = $351,500

Therefore, the ending finished-goods inventory as of 12/31/02 is valued at $351,500.

Calculation of Over-applied or Under-applied Overhead

The actual manufacturing overhead incurred includes:

  • Indirect material: $65,000
  • Indirect labor: $2,860,000
  • Factory depreciation: $1,740,000
  • Factory insurance: $59,000
  • Factory utilities: $830,000

Total actual overhead:

$65,000 + $2,860,000 + $1,740,000 + $59,000 + $830,000 = $5,554,000

Applied overhead during the year was based on direct labor at the predetermined rate:

Applied Overhead = $4,350,000 (Direct Labor) × 1.3 = $5,655,000

The difference indicates whether overhead was over-applied or under-applied:

Over-applied overhead = Applied - Actual = $5,655,000 - $5,554,000 = $101,000

Since this value is positive, overhead was over-applied by $101,000, which should be credited to the cost of goods sold.

Appropriateness of Including Selling and Administrative Expenses in COGS

Generally, selling and administrative expenses are considered period costs and are not included in the cost of goods sold (COGS). COGS encompasses direct costs of production—materials, labor, and manufacturing overhead—related directly to goods manufactured. Selling expenses (such as advertising, sales commissions) and administrative expenses (such as office salaries, administrative supplies) are part of operating expenses and are deducted separately to determine net income. Thus, including selling and administrative expenses in COGS would inaccurately inflate the cost of goods and distort profit margins. Therefore, it is not appropriate to include these expenses in COGS.

Conclusion

The analysis reveals that Finlon Upholstery Inc. applied overhead at a rate of 130%, with total manufacturing costs added during 2002 of approximately $15.6 million. The ending inventory of finished goods was valued at $351,500, consisting solely of the unsold Job no. 2143. The company over-applied overhead by $101,000, which should be adjusted in the financial statements. Additionally, consistent with accounting principles, selling and administrative expenses are excluded from the calculation of COGS, aligning with standard cost accounting practices. These calculations assist managerial and financial decision-making and ensure compliance with generally accepted accounting principles (GAAP).

References

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