Assignment 3: Calculating Inventory For Finlon Uphols 754505

Assignment 3 Calculating Inventoryfinlon Upholstery Inc Uses A Job O

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 $5,600,000.00 Direct Labor $4,350,000.00 Indirect Material Used $65,000.00 Indirect Labor $2,860,000.00 Factory Depreciation $1,740,000.00 Factory Insurance $59,000.00 Factory Utilities $830,000.00 Selling and Administrative Expenses $2,160,000.00 Total $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 company’s 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 12/31/02 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.

Paper For Above instruction

The purpose of this paper is to analyze the manufacturing and cost allocation processes at Finlon Upholstery Inc., focusing on calculating the predetermined overhead application rate, inventory additions, ending finished goods inventory, and the treatment of selling and administrative expenses in cost accounting.

Calculation of Predetermined Overhead Application Rate

Finlon Upholstery applies manufacturing overhead based on direct-labor cost. To determine the predetermined overhead rate, based on budgeted figures, the formula is:

\[ \text{Overhead Rate} = \frac{\text{Budgeted Manufacturing Overhead}}{\text{Budgeted Direct Labor Cost}} \]

Given that the budgeted manufacturing overhead is $5,460,000 and the budgeted direct labor cost is $4,200,000, the calculation is:

\[ \text{Overhead Rate} = \frac{5,460,000}{4,200,000} = 1.3 \text{ or } 130\% \]

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

Calculations of Inventory Additions

The total additions to work-in-process inventory are computed by adding direct materials used, direct labor, and applied manufacturing overhead.

- Direct Materials Used: $5,600,000 (given)

- Direct Labor: $4,350,000 (given)

- Manufacturing Overhead Applied:

\[ \text{Manufacturing Overhead} = \text{Direct Labor} \times \text{Overhead Rate} \]

\[ = 4,350,000 \times 1.3 = \$5,655,000 \]

So, total additions to the work-in-process during 2002 sum up to:

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

Calculation of Ending Finished Goods Inventory

Since Job no. 2077 was completed in January 2002 and no work remained in process at year-end, the ending work-in-process inventory is zero. The only inventory remaining is finished goods.

- Total cost of goods available:

\[ \text{Beginning WIP} + \text{Additions} = \$156,800 + \$15,605,000 = \$15,761,800 \]

- Cost of Goods Sold (COGS):

All completed jobs during 2002 were sold except Job no. 2143, which has direct-materials of $156,000 and direct-labor of $85,000. The cost of Job no. 2143 is:

\[ \$156,000 + \$85,000 = \$241,000 \]

The total COGS, given that only Job no. 2143 remains unsold, is $241,000.

Remaining inventory (ending finished goods) is calculated by subtracting COGS from total goods available:

\[ \$15,761,800 - \$241,000 = \$15,520,800 \]

Calculation of Over-applied or Under-applied Overhead

Total manufacturing overhead incurred includes indirect materials, indirect labor, depreciation, insurance, and utilities:

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

Applied overhead is based on direct labor:

\[ \$4,350,000 \times 1.3 = \$5,655,000 \]

- Over-applied overhead:

\[ \$5,655,000 - \$5,554,000 = \$101,000 \]

Since the applied overhead exceeds actual overhead, the company has over-applied overhead by $101,000.

Treatment of Selling and Administrative Expenses

Selling and administrative expenses amount to $2,160,000. These expenses are considered period costs and are not included in the calculation of costs for inventory valuation or cost of goods sold. They are expensed in the period incurred as per generally accepted accounting principles (GAAP). Including these expenses in COGS would distort the gross profit calculation and does not adhere to standard accounting practices, which segregate manufacturing costs from selling and administrative expenses.

Conclusion

The overhead application rate at Finlon Upholstery Inc. is 130%. The company’s work-in-process additions for 2002 totaled $15,605,000, and after accounting for costs, the ending finished goods inventory is valued at approximately $15.52 million. The company over-applied overhead by $101,000, which should be adjusted against cost of goods sold at year-end. Lastly, the separation of selling and administrative expenses from manufacturing costs is appropriate and necessary for accurate financial reporting as per accounting standards.

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