Inventory and Overhead Chapter 18 Inventory and Overhead

Learning Unit Objectives #18 Inventory and Overhead Learning Unit Objectives LU18.1 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

Learning Unit Objectives #18 Inventory and Overhead Learning Unit Objectives LU18.2 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 Periodic Inventory System - Relies on a physical count of inventory done periodically

Jay Company - Inventory Information Number of Cost Total 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 $1,200 Units Sold 72 Units in ending inventory 48 Step 1

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)

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 Step 2 Step 3 $1,200 - $524 = $676

Weighted-Average 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 average unit cost

Weighted Average Method Number of Cost Total 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 $1,200 Units Sold 72 Units in ending inventory 48 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

First-In, First-Out 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. List the units to be included in the ending inventory and their costs

First-In, First-Out Method Number of Cost Total 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 $1,200 Units Sold 72 Units in ending inventory 48 20 Units from Dec. 1 at $13 $260 20 Units from Oct. 1 at $12 240 8 Units from May 1 at $10 80 48 units in ending inventory $580 Cost of goods sold: $1,200 - $580 = $620

Last-In, First-Out 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. List the units to be included in the ending inventory and their costs

Last-In, First-Out Method Number of Cost Total 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 $1,200 Units Sold 72 Units in ending inventory 48 40 Units from beginning inventory at $8 $320 8 Units from Apr 1 at $9 72 48 units in ending inventory $392 Cost of goods sold: $1,200 - $392 = $808

Summary $1200 120 = $10 $10 x 48 = $480 Bottom up to inventory level (48) 20 x $13 = $260 20 x $12 = 240 12 x $10= 80 $580 Top down to inventory level (52) 40 x $8 = $320 8 x $9 = 72 $392

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

Estimating Inventory - Retail Method 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 4,000 Ending Inventory at retail (Step 3) $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)

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)

The number of times inventory is replaced during a specific time Inventory Turnover The number of times inventory is replaced during a specific time 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 Usually higher due to theft, spoilage, markdowns, etc. At cost = $22,000 = $22,000 = 3.36 $7,500 + $5,600 $ 6,550 2

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

Calculating the Distribution of Overhead by Floor Space Department A - 6,000 square feet Department B - 3,000 square feet Department C - 1,000 square feet Overhead of $90,000 Floor space Ratio Department A 6,000 6,000 = 60% 10,000 Department B 3,000 3,000 = 30% Department C 1,000 1,000 = 10% Department A .60 x $90,000 = $54,000 Department B .30 x $90,000 = $27,000 Department C .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 Sales Ratio Department A $80,000 $ 80,000 = .80 $100,000 Department B 20,000 $20,000 = .20 $100,000 $100,000 Department A .80 x $60,000 = $48,000 Department B .20 x $60,000 = $12,000 Total Overhead Expenses

Problem 18-21: 10 at $ 9.00 = $ 90.00 5 at $10.00 = 50.00 15 $140.00 8 x $9.00 = $72.00 5 x $10.00 = $50.00 3 x 9.00 = 27.00 8 $77.00

Problem 18-22: a. 12 at $1.50 = $ 18.00 LIFO b. 38 sets 4 at $1.60 = 6.40 - 25 sets sold 6 at $2.20 = 13.20 13 inventory 6 at $2.50 = 15.00 12 x $1.50 = $18.00 10 at $3.00 = 30.00 1 x $1.60 = 1.60 38 $82.60 (cost of ending inventory)$19.60 FIFO b. 10 x $3.00 = $30.00 3 x $2.50 = + 7.50 $37.50 (cost of ending inventory) b. Weighted average $82.60 38 = $2.17 x 13 = $28.21 (cost of ending inventory)

Problem 18-24: Inventory turnover at cost = $120,000 $80,000 + $65,000 2 = $120,000 = 1.6551724 = 1.66 $72,500 $120,000 = $120,000 = 1.8390804 = 1.84 $72,000 + $58,500 $65,250

Problem 18-25: Cost Retail Beginning inventory $ 39,000 $ 59,000 Purchases 195,000 395,000 Cost of goods available for sale $234,000 $454,000 Less net sales for year 348,000 Ending inventory at retail $106,000 Cost ratio ($234,000 ÷ $454,000) 52% Ending inventory at cost (.52 x $106,000)$ 55,120

Problem 18-27: Goods available for sale Beginning inventory $ 6,000 Net purchases 64,000 Cost of goods available for sale $70,000 Less: Estimated cost of goods sold: Net sales at retail $49,000 Cost percentage (100% - 35%) .65 Estimated cost of goods sold $31,850 Estimated ending inventory $38,150