Inventory Finlon Upholstery Inc Uses A Job Order Costing Sys

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

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. Write a 1-page paper in Word format, applying APA standards for citations.

Paper For Above instruction

The purpose of this analysis is to evaluate the manufacturing cost accounting procedures of Finlon Upholstery Inc., a company that employs a job-order costing system. This paper calculates the predetermined manufacturing overhead rate, assesses work-in-process and finished goods inventories for the year-end, evaluates the over- or under-applied overhead, and discusses the appropriateness of including selling and administrative expenses in the cost of goods sold (COGS). Employing these metrics provides a comprehensive understanding of the company's cost management in 2002 and highlights areas for potential financial improvement.

Calculation of Predetermined Overhead Application Rate

The predetermined overhead rate is calculated based on estimated manufacturing overhead costs divided by estimated direct labor costs. Budgeted figures provided in the scenario indicate budgeted direct labor costs of $4,200,000 and budgeted manufacturing overhead of $5,460,000. The formula is:

Pre-determined Overhead Rate = Budgeted Manufacturing Overhead / Budgeted Direct Labor Cost


= $5,460,000 / $4,200,000


= 1.3 or 130%

This rate implies that for every dollar of direct labor cost incurred, $1.30 is applied as manufacturing overhead. The application rate is critical for accurate job costing and allocating overhead costs proportionally based on direct labor costs.

Additions to Work-in-Process Inventory

The additions to work-in-process (WIP) inventory consist of direct materials used, direct labor, and manufacturing overhead applied. Using actual data for 2002:

  • Direct Materials Used = $5,600,000
  • Direct Labor = $4,350,000
  • Manufacturing Overhead Applied = Predetermined Rate × Actual Direct Labor Cost = 1.3 × $4,350,000 = $5,655,000

These components sum to the total additions to WIP inventory:

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

The significant overhead applied ensures that job costs reflect the total manufacturing resources consumed during production.

Calculation of Finished Goods Inventory as of December 31, 2002

Job no. 2077 was completed in January 2002, and all other jobs produced during 2002 were sold except for Job no. 2143. Job no. 2143 remains in inventory with direct material costs of $156,000 and direct labor charges of $85,000. To compute finished goods inventory, first determine the total cost of Job no. 2143:

Direct materials = $156,000


Direct labor = $85,000


Overhead applied = 1.3 × $85,000 = $110,500


Total job cost = $156,000 + $85,000 + $110,500 = $351,500

Since all other jobs were sold, the finished goods inventory at year-end consists solely of Job no. 2143:

Finished Goods Inventory = $351,500

Over-applied or Under-applied Overhead Calculation

Total manufacturing overhead applied during the year is $5,655,000 (as above). Actual manufacturing overhead costs are the sum of indirect materials, indirect labor, factory depreciation, insurance, utilities:

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

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

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

Since applied overhead exceeds actual overhead, the company has over-applied overhead by $101,000, which is typically adjusted by decreasing the cost of goods sold or allocating the adjustment proportionally.

Inclusion of Selling and Administrative Expenses in COGS

In managerial accounting, it is generally inappropriate to include selling and administrative expenses in the cost of goods sold because these costs are period expenses. COGS should encapsulate only those costs directly associated with production, such as direct materials, direct labor, and manufacturing overhead. Selling and administrative expenses are considered operating expenses and are deducted separately on the income statement to determine operating income. Including these expenses in COGS would distort gross profit margins and provide misleading information on the true cost of manufacturing.

Therefore, it is considered best practice and consistent with accounting standards to exclude selling and administrative expenses from COGS and report them separately.

Conclusion

This analysis demonstrates that Finlon Upholstery Inc. utilized an efficient cost allocation system, with a predetermined overhead rate of 130%. The detailed calculations illustrate the cost components of production, the value of remaining inventory, and the nature of overhead variances. Adhering to proper product costing principles ensures accurate financial reporting and managerial decision-making. Importantly, excluding selling and administrative expenses from COGS aligns with standard accounting practices, promoting clear and truthful financial statements.

References

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