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18-1. 18-2 Chapter 18 Inventory and Overhead McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill...
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Transcript of 18-1. 18-2 Chapter 18 Inventory and Overhead McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill...
18-1
18-2
Chapter 18Chapter 18Inventory and OverheadInventory and Overhead
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
18-3
• List the key assumptions of each inventory method
• Calculate the cost of ending inventory and cost of goods sold for each inventory method
Inventory and Overhead#18#18Learning Unit ObjectivesAssigning Costs to Ending Inventory - Specific Identification; Weighted Average; FIFO; LIFO
LU18.1LU18.1
18-4
• Calculate the cost ratio and ending inventory at cost for the retail method
• Calculate the estimated inventory, using the gross profit method
• Explain and calculate inventory turnover
• Explain overhead; allocate overhead according to floor space and sales
Inventory and Overhead#18#18Learning Unit ObjectivesRetail Method; Gross Profit Method; Inventory Turnover; Distribution of Overhead
LU18.2LU18.2
18-5
Perpetual Inventory System - keeps a running account of inventory by updating with each transaction
Inventory Systems
Periodic Inventory System - Relies on a physical count of inventory done periodically
18-6
Number of Cost Total
Units Purchased per unit cost
Beginning Inventory 50 $13 $650
First Purchase (Jan 15) 30 12 360
Second Purchase (Feb. 24) 40 10 400
Third Purchase (Apr. 17) 20 9 180
Fourth Purchase (Aug. 24) 20 8 160
Goods available for sale 160 $1,750
Units Sold 108
Units in ending inventory 52
Jay Company - Inventory Information
Step 1
18-7
Step 2. Calculate the cost of ending inventory
Step 3. Calculate the cost of goods sold (Step 1- Step 2)
Step 1. Calculate the cost of goods (Merchandise available for sale)
BegInv.
1/15 2/24 4/17 8/24
Specific Identification Method
18-8
Cost per unit Total cost
10 Units from Jan. 15 $12 $120
16 Units from Feb. 24 $10 160
20 Units from Apr. 17 $9 180
6 Units from Aug. 24 $8 48
$508Cost of goods - Cost of ending = Cost ofavailable for sale inventory goods sold
$1,750 - $508 = $1,242Step 3 Step 2
Specific Identification Method
18-9
Step 2. Calculate the cost of ending inventory
Step 3. Calculate the cost of goods sold (Step 1- Step 2)
Weighted-Average Method
Step 1. Calculate the average unit cost
BegInv.
1/15 2/24 4/17 8/24
18-10
Number of Cost Total
Units Purchased per unit cost
Beginning inventory 50 $13 $650
First purchase (Jan 15) 30 12 360
Second purchase (Feb. 24) 40 10 400
Third purchase (Apr. 17) 20 9 180
Fourth purchase (Aug. 24) 20 8 160
Goods available for sale 160 $1,750
Units sold 108
Units in ending inventory 52
Weighted Average Method
Weighted avg = Total cost of goods available for sale = $1,750 = $10.9375
Unit cost Total number of units available for sale 160
Average cost of ending inventory: 52 units at $10.9375 = $568.75
Cost of goods sold = $1,750 - $568.75 = $1,181.25
18-11
Step 2. Calculate the cost of ending inventory
Step 3. Calculate the cost of goods sold (Step 1- Step 2)
First-In, First-Out Method
Step 1. List the units to be included in the ending inventory and their costs
BegInv.
1/15 2/24 4/17 8/24
18-12
FIFO (Bottom Up) Number of Cost Total
units purchased per unit cost
Beginning Inventory 50 $13 $650
First Purchase (Jan 15) 30 12 360
Second Purchase (Feb. 24) 40 10 400
Third Purchase (Apr. 17) 20 9 180
Fourth Purchase (Aug. 24) 20 8 160
Goods available for sale 160 $1,750
Units Sold 108
Units in ending inventory 52
First-In, First-Out Method
20 Units from Aug. 24 at $8 $160
20 Units from Apr. 17 at $9 180
12 Units from Feb. 24 at $10 120
52 units in ending inventory $460
Cost of goods sold:
$1,750 - $460 =
$1,290
18-13
Step 2. Calculate the cost of ending inventory
Step 3. Calculate the cost of goods sold (Step 1- Step 2)
Last-In, First-Out Method
Step 1. List the units to be included in the ending inventory and their costs
BegInv.
1/15 2/24 4/17 8/24
18-14
LIFO (Top Down) Number of Cost Total
Units Purchased per unit cost
Beginning Inventory 50 $13 $650
First Purchase (Jan 15) 30 12 360
Second Purchase (Feb. 24) 40 10 400
Third Purchase (Apr. 17) 20 9 180
Fourth Purchase (Aug. 24) 20 8 160
Goods available for sale 160 $1,750
Units Sold 108
Units in ending inventory 52
Last-In, First-Out Method
50 Units from beginning inventory at $13 $650
2 Units from Jan/ 15 at $12 24
52 units in ending inventory $674
Cost of goods sold:
$1,750 - $674 =
$1,076
18-15
Summary
Inventory Cost of Goods Cost of endingmethod available for sale inventory
Specific Id. 1,750$ $1,750 - $508 = $1,242
Weighted Avg. 1,750$ $1,750 - $568.75 = $1181.25
FIFO 1,750$ $1,750 - $460 = $1,290
LIFO 1,750$ $1,750 - $674 = $1,076
Cost of goodssold
Top down to inventory level (52)50 x $13 = $650 2 x $12 = 24 $674
Bottom up to inventory level (52)20 x $8 = $16020 x $9 = 18012 x $10= 120 $460
$1,750
160 = $10.9375
$10.9375 x 52 = $568.75
10 x $12 = $12016 x $10 = 16020 x $ 9 = 180 6 x $ 8 = 48 $ 508
18-16
Estimating Inventory - Retail Method
Step 1. Calculate the cost of goods available for sale at cost and retail
Step 2. Calculate a cost ratio using the following formula
Cost of goods available for sale at costCost of goods available for sale at retail
Step 3. Deduct net sales from cost of goods available for sale at retail
Step 4. Multiply the cost ratio by the ending inventory at retail
18-17
Cost Retail
Beginning Inventory $2,000 $3,800
Net purchases during month 1,000 1,200
Cost of goods available for sale (Step 1) $3,000 $5,000
Less net sales for month 3,100
Ending Inventory at retail (Step 3) $1,900
Cost ratio ($3,000/$5,000) (Step 2) 60%
Ending Inventory at cost ($1,900 x .60) (Step 4) $1,140
Estimating Inventory - Retail Method
18-18
Estimating Inventory - Gross Profit Method
Step 1. Calculate the cost of goods available for sale (Beginning inventory + Net purchases)
Step 2. Multiply the net sales at retail by the complement of the gross profit rate. This is the estimated cost of goods sold
Step 3. Calculate the cost of estimated ending inventory (Step 1- Step 2)
Assuming the following, calculate the estimated inventory
Gross profit on sales 30%
Beginning inventory June 1, 2004 $20,000
Net purchases 8,000
Net sales at retail for June 12,000
18-19
Beginning Inventory, June 1, 2006 $20,000
Net purchases 8,000
Cost of goods available for sale (Step 1) $28,000
Less estimated cost of good sold:
Net sales at retail $12,000
Cost Percentage (100% - 30%) x .70 (Step 2)
Estimated cost of goods sold - 8,400
Estimated ending inventory, June 30, 2006 $19,600 (Step 3)
Estimating Inventory - Gross Profit Method
18-20
Inventory Turnover
The number of times inventory is replaced during a specific time
Inventory turnover at retail = Net salesAverage inventory at retail
Inventory turnover at cost = Cost of goods soldAverage inventory at cost
18-21
Inventory Turnover
Net sales $32,000 Cost of goods sold $22,000
Beginning inventory at retail 11,000 Beginning inventory at cost 7,500
Ending inventory at retail 8,900 Ending inventory at cost 5,600
Average inventory = Beginning inventory + Ending inventory 2
At retail = $32,000 = $32,000 = 3.22 $11,000 + $8,900 $9,950
2
At cost = $22,000 = $22,000 = 3.36 $7,500 + $5,600 $ 6,550
2
Usually higher due to theft, spoilage, markdowns, etc.
18-22
Calculating the Distribution of Overhead by Floor Space
Step 1. Calculate the total square feet in all departments
Step 2. Calculate the ratio for each department based on floor space
Step 3. Multiply each department’s floor space ratio by the total overhead
18-23
Department A - 2,500 square feet Department B - 5,500 square feet Department C - 2,000 square feet Overhead of $100,000
Floor space Ratio
Department A 2,500 2,500 = 25%10,000
Department B 5,500 5,500 = 55%10,000
Department C 2,000 2,000 = 20%10,000
Department A .25 x $100,000 = $25,000Department B .55 x $100,000 = $55,000Department C .20 x $100,000 = $20,000
Step 1 & 2
Calculating the Distribution of Overhead by Floor Space
18-24
Calculating the Distribution of Overhead by Sales
Step 1. Calculate the total sales in all departments
Step 2. Calculate the ratio for each department based on sales
Step 3. Multiply the total sales in all departments
Sales RatioDepartment A $150,000 $150,000 = .75
$200,000Department B 50,000 $50,000 = .25
$200,000 $200,000
Department A .75 x $50,000 = $37,500Department B .25 x $50,000 = $12,500
TotalOverhead Expenses