Finlon Upholstery Inc. Use A Job Order Costing System
Finlon Upholstery Inc Use A Job Order Costing System To Accumulate M
Finlon Upholstery Inc. employs a job-order costing system to accumulate manufacturing costs. At the close of 2001, the company’s work-in-process inventory consisted of a single job, No. 2077, valued at $156,800, with no finished goods inventory. The company applies manufacturing overhead based on actual direct-labor costs, referencing a budgeted overhead rate derived from the practical capacity. In 2002, the budgeted total direct labor cost was $4,200,000, and the budgeted manufacturing overhead was $5,460,000. The actual results for 2002 include direct materials used totaling $5,600,000, direct labor cost of $4,350,000, and various manufacturing overhead components, including indirect materials ($65,000), indirect labor ($2,860,000), factory depreciation ($1,740,000), factory insurance ($59,000), and factory utilities ($830,000). Total manufacturing costs for 2002 amounted to $17,664,000. Job No. 2077 was completed in January 2002, with no remaining 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. Additionally, the company applies any over- or under-applied overhead to the cost of goods sold (COGS).
Using this information, the following calculations are required:
- The predetermined overhead application rate
- The additions to the work-in-process inventory account for direct materials, direct labor, and manufacturing overhead
- The finished goods inventory as of December 31, 2001
- The over-applied or under-applied overhead at year-end
- An explanation of whether selling and administrative expenses should be included in COGS
Paper For Above instruction
Introduction
In manufacturing accounting, job-order costing provides a method for accumulating costs associated with individual jobs or batches. Finlon Upholstery Inc. exemplifies such a system, with specific focus on determining overhead application rates, inventory valuation, and the appropriate treatment of selling and administrative expenses. Understanding these concepts is essential for accurate financial reporting and managerial decision-making.
Predetermined Overhead Application Rate
The predetermined overhead rate (POHR) is calculated before the period begins, based on estimated costs and activity levels. Since the company applies overhead based on direct-labor costs, the rate is computed as:
\[ \text{POHR} = \frac{\text{Budgeted Manufacturing Overhead}}{\text{Budgeted Direct Labor Cost}} \]
Using the budgeted figures provided:
\[ \text{POHR} = \frac{\$5,460,000}{\$4,200,000} = 1.3 \text{ or } 130\% \]
This indicates that for every dollar of direct labor, $1.30 is allocated as manufacturing overhead.
Additions to Work-in-Process Inventory
The additions to WIP for direct materials, direct labor, and manufacturing overhead are based on actual costs and applied overhead.
- Direct Materials Used: $5,600,000 (given)
- Direct Labor: $4,350,000 (given)
- Manufacturing Overhead Applied:
\[
\text{Overhead Applied} = \text{POHR} \times \text{Actual Direct Labor Cost}
\]
\[
= 1.3 \times \$4,350,000 = \$5,655,000
\]
Total manufacturing costs (additions to WIP):
\[
\$5,600,000 + \$4,350,000 + \$5,655,000 = \$15,605,000
\]
Note: The overhead applied ($5,655,000) will be compared with actual overhead costs to determine over- or under-applied overhead.
Finished Goods Inventory as of December 31, 2001
The beginning WIP inventory is valued at $156,800 (for job 2077). Since this job was completed in January 2002, the entire designated work-in-process at year's end is assumed to be the opening balance.
The cost of the job completed, Job 2077, is included in the WIP at $156,800. Since no additional WIP exists at year-end, and no other jobs are in process, the finished goods inventory as of December 31, 2001, is effectively zero. The value of finished goods inventory must include the cost of any jobs completed but not yet sold; however, based on the provided data, all jobs produced in 2002 were sold, except for Job 2143, which is still in inventory at year-end.
Therefore, the finished goods inventory as of December 31, 2001, is $0.
Over-applied or Under-applied Overhead
The actual manufacturing overhead costs incurred include:
- Indirect materials: $65,000
- Indirect labor: $2,860,000
- Factory depreciation: $1,740,000
- Factory insurance: $59,000
- Factory utilities: $830,000
Total actual manufacturing overhead:
\[
\$65,000 + \$2,860,000 + \$1,740,000 + \$59,000 + \$830,000 = \$5,554,000
\]
The overhead applied (from previous calculation): $5,655,000
Over-applied overhead:
\[
\text{Over-applied} = \text{Applied} - \text{Actual} = \$5,655,000 - \$5,554,000 = \$101,000
\]
Since the applied overhead exceeds actual overhead, the company has over-applied overhead by $101,000.
Adjustment:
The company charges over- or under-applied overhead to COGS, so COGS must be adjusted downward by $101,000.
Should Selling and Administrative Expenses be Included in COGS?
Selling and administrative expenses, totaling $2,160,000, are not included in the cost of goods sold because they are period costs, incurred regardless of production volume, and are associated with the overall operation rather than specific products. Including these expenses in COGS would distort gross profit calculations and is inconsistent with generally accepted accounting principles (GAAP). Instead, they are reported separately on the income statement as operating expenses.
Conclusion
The analysis confirms that the predetermined overhead rate is 130%. The total manufacturing costs assigned to jobs in 2002 were approximately $15.6 million. The finished goods inventory at year-end was negligible, and the company over-applied overhead by around $101,000, which should be adjusted against COGS. Finally, separating selling and administrative expenses from COGS aligns with standard accounting practices, ensuring accurate financial reporting and meaningful profitability assessment.
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