Calculating Inventory Finlon Upholstery Inc Uses A Job Order

Calculating Inventoryfinlon Upholstery Inc Uses A Job Order Costing

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 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 12/31/01 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.

Paper For Above instruction

Introduction

Finlon Upholstery Inc. operates a job-order costing system that allocates manufacturing costs based on direct labor costs, which is common in industries where products are highly customized such as upholstery. The company’s accounting records as of December 31, 2001, reveal valuable data that facilitate the calculation of various cost components necessary for financial analysis and decision-making. This paper elaborates on the calculation of the predetermined overhead rate, additions to WIP inventory, the balance of finished goods inventory, and the consideration of selling and administrative expenses within the cost of goods sold (COGS).

Calculation of Predetermined Overhead Application Rate

The predetermined overhead rate is critical as it influences the allocation of manufacturing overhead costs to jobs throughout the year. It is calculated using the formula:

\[

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

\]

Using provided data, the budgeted totals for 2002 are $5,460,000 for manufacturing overhead and $4,200,000 for direct labor. Therefore:

\[

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

\]

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

Calculating Additions to Work-in-Process Inventory

The additions to WIP inventory include direct materials used, direct labor, and applied manufacturing overhead. The actual direct materials used during 2002 were $5,600,000, and direct labor was $4,350,000. Manufacturing overhead applied is computed as:

\[

\text{Manufacturing Overhead Applied} = \text{Direct Labor Cost} \times \text{Overhead Rate}

\]

\[

= 4,350,000 \times 1.3 = 5,655,000

\]

Hence, the total additions to the WIP are:

- Direct Materials: $5,600,000

- Direct Labor: $4,350,000

- Applied Overhead: $5,655,000

The total WIP additions for the year amount to $15,605,000.

Finished Goods Inventory Calculation

At December 31, 2001, the work-in-process inventory was valued at $156,800, representing incomplete jobs. Since Job No. 2077 was completed in January 2002 and no work-in-process remained at year-end, the finished goods inventory on 12/31/2001 was solely the beginning WIP value. No additional finished goods were added during the year, and all jobs produced in 2002 were sold except for Job No. 2143, which remained as inventory.

Given no ending WIP, the ending finished goods inventory on the balance sheet remains at zero at year-end. The $156,800 valuation of Job No. 2077 is transferred to finished goods during 2002 upon completion.

Over-applied or Under-applied Overhead

The actual manufacturing overhead incurred includes indirect materials ($65,000), indirect labor ($2,860,000), depreciation ($1,740,000), insurance ($59,000), utilities ($830,000), totaling $5,554,000. The applied overhead based on direct labor is $5,655,000, as calculated earlier.

The over-applied overhead is:

\[

\text{Over-applied Overhead} = \text{Applied Overhead} - \text{Actual Overhead}

\]

\[

= 5,655,000 - 5,554,000 = 101,000

\]

Since the applied overhead exceeds actual overhead, it results in over-applied overhead of $101,000, which the company charges to Cost of Goods Sold.

Inclusion of Selling and Administrative Expenses in COGS

Selling and administrative expenses are period costs and are not directly linked to production. Including them in COGS would distort gross profit calculations and misrepresent manufacturing performance. Generally, these expenses are expensed separately in the income statement, reflecting their nature as costs of selling and administrative functions rather than manufacturing processes. Consequently, it is inappropriate to include selling and administrative expenses in the cost of goods sold category.

Conclusion

The calculation of the predetermined overhead rate as 130% of direct labor cost guides the consistent application of manufacturing overhead. Additions to the work-in-process inventory comprise direct materials, direct labor, and applied overhead, totaling over $15.6 million for the year. With no ending WIP, the finished goods inventory balance depends on initial work-in-process and the transfer of completed jobs. The small over-applied overhead indicates efficient overhead control, and excluding selling and administrative expenses from COGS aligns with standard accounting practices. These calculations provide vital insights into manufacturing cost management and financial reporting, supporting ongoing operational and strategic decisions.

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