Chapter 18 - Inventory and overhead. In this chapter, the learning objectives are: List the key assumptions of each inventory method, calculate the cost of ending inventory and cost of goods sold for each inventory method, 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.
Chapter 18 Inventory and Overhead McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #18 LU18.1 Inventory and Overhead Learning Unit Objectives Assigning Costs to Ending Inventory Specific Identification; Weighted Average; FIFO; LIFO List the key assumptions of each inventory method Calculate the cost of ending inventory and cost of goods sold for each inventory method 182 #18 LU18.2 183 Inventory and Overhead Learning Unit Objectives Retail Method; Gross Profit Method; Inventory Turnover; Distribution of Overhead 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 Systems Perpetual Inventory System keeps a running account of inventory by updating with each transaction 184 Periodic Inventory System Relies on a physical count of inventory done periodically Blue Company Inventory Information Number of Cost Units Purchased per unit cost Beginning Inventory 40 $8 $320 First Purchase (April 1) 20 9 180 Second Purchase (May 1) 20 10 200 Third Purchase (Oct. 1) 20 12 240 Fourth Purchase (Dec. 1) 20 13 260 Goods available for sale 120 Units Sold 72 Units in ending inventory 48 Total $1,200 Step 1 185 Specific Identification Method Beg Inv 4/1 5/1 10/1 12/1 Step 3. Calculate the cost of goods sold (Step 1 Step 2) Step 2. Calculate the cost of ending inventory Step 1. Calculate the cost of goods (Merchandise available for sale) 186 Specific Identification Method Cost per unit Total cost 20 Units from April 1 $ 9 $180 20 Units from Oct. 1 $12 240 8 Units from Dec. 1 $13 104 Cost of ending inventory $524 Cost of goods Cost of ending = Cost of available for sale inventory goods sold $1,200 $524 = $676 187 Step 3 Step 2 Weighted Average Method Number of Cost Units Purchased per unit cost Beginning Inventory 40 $8 $320 First Purchase (April 1) 20 9 180 Second Purchase (May 1) 20 10 200 Third Purchase (Oct. 1) 20 12 240 Fourth Purchase (Dec. 1) 20 13 260 Goods available for sale 120 Units Sold 72 Units in ending inventory 48 Total $1,200 Weighted avg = Total cost of goods available for sale = $1,200 = $10 Unit cost Total number of units available for sale 120 Average cost of ending inventory: 48 units at $10 = $480 Cost of goods sold = $1,200 $480 = $720 188 FirstIn, FirstOut Method Number of Cost Units Purchased per unit cost Beginning Inventory 40 $8 $320 First Purchase (April 1) 20 9 180 Second Purchase (May 1) 20 10 200 Third Purchase (Oct. 1) 20 12 240 Fourth Purchase (Dec. 1) 20 13 260 Goods available for sale 120 Units Sold 72 Units in ending inventory 48 $1,200 20 Units from Dec. 1 at $13 20 Units from Oct. 1 at $12 8 Units from May 1 at $10 $260 240 80 48 units in ending inventory $580 189 Total Cost of goods sold: $1,200 $580 = $620 LastIn, FirstOut Method Number of Cost Units Purchased per unit cost Beginning Inventory 40 $8 $320 First Purchase (April 1) 20 9 180 Second Purchase (May 1) 20 10 200 Third Purchase (Oct. 1) 20 12 240 Fourth Purchase (Dec. 1) 20 13 260 Goods available for sale 120 Units Sold 72 Units in ending inventory 48 $1,200 40 Units from beginning inventory at $8 $320 8 Units from Apr 1 at $9 72 48 units in ending inventory 1810 Total $392 Cost of goods sold: $1,200 $392 = $808 Estimating Inventory Retail Method Step 4. Multiply the cost ratio by the ending inventory at retail Step 3. Deduct net sales from cost of goods available for sale at retail Step 2. Calculate a cost ratio using the following formula Cost of goods available for sale at cost Cost of goods available for sale at retail Step 1. Calculate the cost of goods available for sale at cost and retail 1811 Estimating Inventory Retail Method 1812 Cost Retail Beginning Inventory $4,000 $6,000 Net purchases during month 2,300 3,000 Cost of goods available for sale (Step 1) $6,300 $9,000 Less net sales for month (Step 3) 4,000 Ending Inventory at retail $5,000 Cost ratio ($6,300/$9,000) (Step 2) 70% Ending Inventory at cost ($5,000 x .70) (Step 4) $3,500 Estimating Inventory Gross Profit Method Assuming the following, calculate the estimated inventory Gross profit on sales 30% Beginning inventory June 1, 2009 $20,000 Net purchases 8,000 Net sales at retail for June 12,000 Step 3. Calculate the cost of estimated ending inventory (Step 1 Step 2) 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 1. Calculate the cost of goods available for sale (Beginning inventory + Net purchases) 1813 Estimating Inventory Gross Profit Method Beginning Inventory, June 1, 2009 $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, 2009 $19,600 (Step 3) 1814 Inventory Turnover The number of times inventory is replaced during a specific time 1815 Inventory turnover at retail = Net sales Average inventory at retail Inventory turnover at cost = Cost of goods sold Average inventory at cost 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 1816 Usually higher due to theft, spoilage, markdowns, etc Calculating the Distribution of Overhead by Floor Space Step 3. Multiply each department’s floor space ratio by the total overhead Step 2. Calculate the ratio for each department based on floor space Step 1. Calculate the total square feet in all departments 1817 Calculating the Distribution of Overhead by Floor Space (Roy Company) Department A 6,000 square feet Department B 3,000 square feet Department C 1,000 square feet Overhead of $90,000 Floor space Department A 6,000 6,000 = 60% 10,000 Department B 3,000 Department C 1,000 3,000 = 30% 10,000 1,000 = 10% 10,000 Department A Department B Department C 1818 Ratio 60 x $90,000 = $54,000 30 x $90,000 = $27,000 10 x $90,000 = $ 9,000 Step 1 & 2 Calculating the Distribution of Overhead by Sales Step 3. Multiply each department’s sales ratio by the total overhead Step 2. Calculate the ratio for each department based on sales Step 1. Calculate the total sales in all departments 1819 Calculating the Distribution of Overhead by Sales (Morse Company) Morse Company distributes its overhead expenses based on the sales of its departments. For example, last year Morse’s overhead expenses were $60,000. Sales of its two departments were as follows, along with its ratio calculation Department A Department B Sales $80,000 20,000 $100,000 Ratio $ 80,000 = .80 $100,000 $20,000 = .20 $100,000 Department A 80 x $60,000 = $48,000 Department B 20 x $60,000 = $12,000 $60,000 1820 Total Overhead Expenses ... Calculate the cost of ending inventory and cost of goods sold for each inventory method 18 2 #18 LU18.2 18 3 Inventory and Overhead Learning Unit Objectives Retail Method; Gross Profit Method; ... #18 LU18.1 Inventory and Overhead Learning Unit Objectives Assigning Costs to Ending Inventory Specific Identification; Weighted ... Step 1. Calculate the cost of goods (Merchandise available for sale) 18 6 Specific Identification Method Cost per unit Total cost 20 Units from April 1 $ 9 $180 20 Units from Oct. 1 $12 240 8 Units from Dec. 1