Inventory Finlon Upholstery Inc. Uses A Job Order Costing Sy

Inventory Finlon Upholstery Inc Uses A Job Order Costing System To Ac

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.

Paper For Above instruction

Finlon Upholstery Inc. employs a job-order costing system to accurately allocate manufacturing costs to individual jobs. The company's financial data for the year 2002 reveal significant insights into cost management and inventory valuation. This paper systematically addresses the required calculations and explanations based on the provided data, emphasizing cost allocation, inventory valuation, and expense categorization within cost accounting principles.

Introduction

Job-order costing systems are essential for companies that produce customized products or distinct batches, allowing precise cost tracking for individual jobs. For Finlon Upholstery Inc., understanding its cost drivers and overhead application rates informs pricing, profitability analysis, and financial reporting. This analysis begins with calculating the predetermined overhead rate, an essential metric that influences the allocation of manufacturing overhead costs across jobs throughout the year.

Calculation of Predetermined Overhead Application Rate

The predetermined overhead rate is established before the period begins, based on estimated costs and activity levels. It is calculated as the ratio of budgeted manufacturing overhead to budgeted direct labor cost:

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

Using the provided figures, the budgeted direct labor and manufacturing overhead costs for 2002 are $4,200,000 and $5,460,000, respectively. Substituting these values:

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

This means that for every dollar of direct labor cost incurred, $1.30 of manufacturing overhead will be allocated to jobs.

Calculations of Additions to the Work-in-Process Inventory

The work-in-process (WIP) inventory includes direct materials used, direct labor, and applied manufacturing overhead. Given the actual direct materials used ($5,600,000) and direct labor costs ($4,350,000), the manufacturing overhead applied is calculated by multiplying actual direct labor costs by the predetermined overhead rate:

Manufacturing Overhead Applied = Actual Direct Labor  Predetermined Overhead Rate = $4,350,000  1.3 = $5,655,000

Thus, the total additions to the WIP account for 2002 are:

  • Direct Materials Used: $5,600,000
  • Direct Labor: $4,350,000
  • Manufacturing Overhead Applied: $5,655,000

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

The company's work-in-process at the end of 2001 was $156,800 on Job no. 2077, which was completed in January 2002. Since all jobs produced during 2002 were sold except for Job no. 2143, which has direct material costs of $156,000 and direct labor of $85,000, the inventory valuation focuses on this remaining job.

The total cost of Job no. 2143 equals the sum of direct material, direct labor, and applied manufacturing overhead:

Total Job Cost = Direct Material + Direct Labor + Applied Overhead = $156,000 + $85,000 + (Application Rate  Direct Labor) = $156,000 + $85,000 + (1.3  $85,000) = $156,000 + $85,000 + $110,500 = $351,500

The finished-goods inventory as of 12/31/2002, comprises the cost of the remaining unsold job (Job 2143), totaling $351,500.

Calculation of Over-Applied or Under-Applied Overhead

The actual manufacturing overhead incurred includes indirect materials ($65,000), indirect labor ($2,860,000), factory depreciation ($1,740,000), factory insurance ($59,000), and factory utilities ($830,000), summing to:

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

Comparing this with manufacturing overhead applied ($5,655,000), the over-applied overhead is:

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

This indicates the company over-applied overhead expenses by $101,000, which should be adjusted against cost of goods sold or allocated proportionally across inventory accounts.

Inclusion of Selling and Administrative Expenses in Cost of Goods Sold

According to generally accepted accounting principles (GAAP), selling and administrative expenses are period costs and should not be included in the cost of goods sold (COGS). These expenses relate to the overall management and marketing activities and are recognized as expenses in the period incurred. Including them in COGS would distort gross profit calculations and misrepresent the company's operational efficiency. Therefore, it is inappropriate to include selling and administrative expenses in the COGS category; instead, they should be recorded as operating expenses on the income statement.

Conclusion

Finlon Upholstery Inc.'s calculation of the predetermined manufacturing overhead rate at 130% ensures accurate cost allocation. The accumulation of direct materials, labor, and applied overhead provides a comprehensive view of production costs, with the remaining inventory valued at $351,500 at year's end. Over-applied overhead of $101,000 signifies more expense was allocated than incurred, necessitating adjustment. Finally, recognizing that selling and administrative expenses are period costs aligns with standard accounting practices, preserving the integrity of financial reports and facilitating accurate profitability analysis.

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