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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 companys 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 and provideyour calculations in an Excel spreadsheet . Copy the calculations into a Word document and

Write a 1-page paper in Word format. Apply APA standards to citation of sources.

Cost Behavior Cost behavior is the volatility of product costs due to changes in production levels or sales volumes. Product costs include material costs, labor costs, and other overheads. Any change in the production levels and sales volumes can affect profitability. Here are some examples of how costs change: Variable costs change in proportion to total volume produced but remain the same on a perunit basis. Fixed costs differ from variable costs in that they remain constant with change in volume produced but vary on a perunit basis. Mixed costs are a combination of fixed and variable costs. Step costs vary over a wide range of activity levels but remain constant over a narrow range. In addition to these types of costs, here are some terms you will also learn: Contribution margin is the difference between the total sales and the total variable costs of an organization. Variablecosting statement presents the net income obtained by subtracting fixed expenses from the difference between total sales and total variable costs. Costvolumeprofit analysis determines the financial impact of the relationship between cost, volume, and profit. Breakeven analysis determines whether or not total sales are equal to the total costs. A company reaches the breakeven point when it is making neither a profit nor a loss. Variable costing is the unit cost of a product obtained by including both direct or variable costs and excluding fixed costs. Absorption costing is the unit cost of a product obtained by including the direct as well as indirect or fixed costs. In this module, you will become familiar with overall cost concepts, and analyze cost behavior within various costing systems. Methods for using costs in planning and budgeting decisions will also be covered. Costs are used to evaluate past performance and make crucial decisions that may impact the entity indefinitely across all departments and levels. Module 1 Overview The first element of managerial accounting is cost behavior within an organization. Management analysis of cost behavior influences cost classifications and decisions made in order to control costs. This module covers two main conceptscost management and how it is used in strategic decision making. In any strategic decision making, ethics always should be top priority. Not only is making ethical decisions the correct thing to do, but it is also key to running an efficient, longterm business. For example, assume you are in charge of the pharmacy in a hospital. In your role as manager, you need to help control the cost of medications administered to patients. Many of these drugs are very expensive and are never fully reimbursed by the patients' insurance companies. One day, an individual offers to sell you the required medications for exactly onehalf of the cost currently paid. This individual represents a company that has had significant issues with timely delivery in the past and that has been subject to multiple lawsuits by other hospitals. The company's failure to deliver the drugs on time had caused significant patientcare issues within those hospitals. Strictly from a cost standpoint, you might think it would be sensible to switch to this vendor. However, ethically, is it appropriate to make the switch that may save cost but also risk the wellbeing of patients? Strategic decisions are the most important decisions a company can make because they dictate future decisions and level of organization performance. Some common examples of strategic decisions include: Finding or seeking out new business opportunities that will allow the organization to grow and expand Responding to any threats to competitive advantage to protect the company's place in the industry Creating goals related to the performance of the organization and finding ways to reach these goals in a reasonable time frame There are many other strategic decisions not listed that companies make on a daily basis. Cost management is made up of three parts: A philosophy to increase customer value while keeping costs at a minimum An attitude that accepts all decisions made by management will incur a cost Techniques to allow an organization to increase customer value while at the same time reducing costs In order to do these three things, managers must always collect and interpret information to find alternate ways of doing business. One common way of doing this is through a costbenefit analysis. A costbenefit analysis is used to assess the believed benefits and costs of a business move. If the benefits outweigh the costs, the decision will be considered beneficial. If the costs outweigh the benefits, the decision will not be considered worthwhile. Kotter's EightStep Change Model In an organization, cost analysts are considered valuable sources of information as they analyze and understand how the value chain of the organization impacts cost, quality, and overall customer quality. Companies use costmanagement teams to evaluate other ways of doing business and provide recommendations on strategy. Forming and implementing a strategic plan is an extremely important part of running and maintaining a successful business. Kotter's EightStep Change Model (1996) is the most simple and commonly used way to form a strategic plan. The eight steps of this process are described as follows: 1. Identify a need by looking within the organization and determining what needs to be changed. 2. Assemble a team to lead and manage the change by identifying people within the organization who are best suited to improve the running of the company. 3. Develop a change vision and strategy for achieving it by finding out the best way to implement the changes within the company. 4. Communicate the vision and strategy for change by making the members of the change team role models and by making all employees aware of the company's new vision. 5. Encourage innovation and remove obstacles by always being open to change and not focusing on the past. 6. Ensure shortterm achievements are frequent and obvious. 7. Use successes to create opportunities for improvement in the entire organization. 8. Reinforce a culture of change by promoting more improvement, better leadership, and more effective management. Kotter, J. P. (1996). Leading change. New York, NY: Harvard Business Review Press. Allocation of Overhead The biggest challenge to analyzing and computing costs is the allocation of overhead. Imagine that you are building a new home. When meeting with the contractor, he or she will give you an approximate price to build the home. That price is based on the builder's cost to build the house as well as the profit expected for the contractor. Based on the home plans and supplier relationships, the builder can easily calculate the cost of materials and labor of subcontractors who would carry out the daytoday construction. It gets complicated when it comes to the other costs the builder incurs. These costs, known as overheads, need to be recovered, but they are not directly tied to the cost of your home. Examples of such costs would be advertising, gasoline for trucks used by supervisors to drive between construction sites, salaries for secretaries and support staff in the office, and any other cost of the sort. How can a builder take these costs and allocate them fairly across all projects? In this module, you will explore joborder costing systemsone method commonly used to allocate overheads and estimate costs of a project provided to a customer. Cost management analysts work very closely with other management colleagues to put together cost management systems that coincide with the overall decisionmaking strategies of the organization. One important component of the cost management system is the product costing system that accumulates all production costs and assigns them to the appropriate products. The most commonly used product costing systems are joborder costing and process costing. When joborder costing is implemented, each separate job is treated as a separate unit of output and costs are assigned as the resources are used up. A job is defined as a single product or small group of similar products. Joborder costing is useful for identifying which types of jobs will be most profitable for a company, predicting future costs, managing costs, contract renegotiations, and financial reporting. When process costing is used, all units produced during the time period are considered output. The costs are not separated and broken down for each individual unit as they are with joborder costing. Costing Methods Operation costing is a cross between joborder costing and process costing. This process is used when an organization produces great amounts of similar products that require the use of different materials, for example, pants made from many different materials such as wool, cotton, polyester, and spandex. In joborder costing, multiple files are used to track the costs of materials used for the job such as data sources for product costing, costing estimation for jobs in the future, and internal and external financial reporting. When using costing methods, assigning cost can be very difficult, and the best way to do this is to use predetermined overhead rates to assign manufacturing overhead costs. This rate is usually determined at the beginning of the year and stays constant for the whole year. Predetermined overhead rates remove any fluctuations in the application of manufacturing overhead rates to various jobs. The final product costs are said to be normal costs because of this. The manufacturing overhead account is important and is used very often. It records both the actual overhead and the overhead that is applied to the work in process inventory. When normal costing is used, the actual overhead is almost never equal to the applied manufacturing overhead. This difference is known as over variance. This variance can either be overapplied or underapplied. Underapplied variances occur when the actual cost is greater than what was actually applied. Overapplied variances occur when the actual cost is less than what was actually applied. Standard costing and actual costing are the alternative methods to normal costing. In actual costing, the actual costs of both direct and indirect resources are applied to the products. In standard costing, costs are assigned to products after applying predetermined or standard rates for both direct and indirect costs. It is difficult to manage jobs, but it is important as this is how cost is minimized, and quality is maximized. Having this philosophy helps to maintain a high level of customer satisfaction. One of the common ways of managing jobs is by implementing project percentage of completion charts. This is a chart that shows how much of the project should be completed at a set time and how much actually has been completed. Another commonly used method is the Gantt chart, which shows all the necessary stages needed to complete the project and in what order they should be completed. Assignment 3: Calculating Inventory Finlon Upholstery Inc. uses a joborder costing system to accumulate manufacturing costs. The company's workinprocess on December 31, 2001, consisted of one job (no. 2077), which was carried on the yearend balance sheet at $156,800. There was no finishedgoods inventory on this date. Finlon applies manufacturing overhead to production on the basis of directlabor cost. (The budgeted directlabor cost is the company's practical capacity, in terms of directlabor hours multiplied by the budgeted directlabor 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 yearend. All jobs produced during 2002 were sold with the exception of Job no. 2143, which contained directmaterial costs of $156,000 and directlabor charges of $85,000. The company charges any under or overapplied 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 workinprocess inventory account for the direct material used, direct labor, and manufacturing overhead. Calculate the finishedgoods inventory for the 12/31/02 balance sheet. Calculate the overapplied or underapplied overhead at yearend. 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 1page 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. By Wednesday, September 2, 2015, deliver your assignment to the M1: Assignment 3 Dropbox. Assignment 3 Grading Criteria Calculated the company's predetermined overhead application rate. Maximum Points 24 Calculated the additions to the workinprocess inventory account for the direct material used, direct labor, and manufacturing overhead. Calculated the finishedgoods inventory for the balance sheet dated 12/31/02. Calculated the overapplied or underapplied overhead at yearend. Explained if it is appropriate to include the selling and administrative expenses in the cost of goods sold category. Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; and displayed accurate spelling, grammar, and punctuation. Total: 16 20 20 12 8 100 TEXT Title: Author: Edition / Copyright: Publisher: ISBN: Managerial Accounting Garrison; Ray H. Garrison; Eric W. Noreen; Peter C. Brewer 14 McGraw-Hill Higher Education 9780078111006