1. Inventory and Overhead
Chapter 18
Inventory and Overhead

2. 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

3. 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

4. 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

5. Jay Company - Inventory Information
Number of Cost Total
Units Purchased per unit cost
Beginning Inventory $ $320
First Purchase (April 1)
Second Purchase (May 1)
Third Purchase (Oct. 1)
Fourth Purchase (Dec. 1)
Goods available for sale $1,200
Units Sold
Units in ending inventory
Step 1

6. 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)

7. Specific Identification Method
Cost per unit Total cost
20 Units from April 1 $ 9 $180
20 Units from Oct. 1 $
8 Units from Dec. 1 $
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

8. 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

9. Weighted Average Method
Number of Cost Total
Units Purchased per unit cost
Beginning Inventory $ $320
First Purchase (April 1)
Second Purchase (May 1)
Third Purchase (Oct. 1)
Fourth Purchase (Dec. 1)
Goods available for sale $1,200
Units Sold
Units in ending inventory
Weighted avg = Total cost of goods available for sale = $1,200 = $10
Unit cost Total number of units available for sale
Average cost of ending inventory: 48 units at $10 = $480
Cost of goods sold = $1,200 - $480 = $720

10. 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

11. First-In, First-Out Method
Number of Cost Total
Units Purchased per unit cost
Beginning Inventory $ $320
First Purchase (April 1)
Second Purchase (May 1)
Third Purchase (Oct. 1)
Fourth Purchase (Dec. 1)
Goods available for sale $1,200
Units Sold
Units in ending inventory
20 Units from Dec. 1 at $13 $260
20 Units from Oct. 1 at $
8 Units from May 1 at $
48 units in ending inventory $580
Cost of goods sold:
$1,200 - $580 = $620

12. 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

13. Last-In, First-Out Method
Number of Cost Total
Units Purchased per unit cost
Beginning Inventory $ $320
First Purchase (April 1)
Second Purchase (May 1)
Third Purchase (Oct. 1)
Fourth Purchase (Dec. 1)
Goods available for sale $1,200
Units Sold
Units in ending inventory
40 Units from beginning inventory at $8 $320
8 Units from Apr 1 at $
48 units in ending inventory $392
Cost of goods sold:
$1,200 - $392 = $808

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

15. 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

16. Estimating Inventory - Retail Method
Cost Retail
Beginning Inventory $4,000 $6,000
Net purchases during month 2, ,000
Cost of goods available for sale (Step 1) $6,300 $9,000
Less net sales for month ,000
Ending Inventory at retail (Step 3) $5,000
Cost ratio ($6,300/$9,000) (Step 2) %
Ending Inventory at cost ($5,000 x .70) (Step 4) $3,500

17. Estimating Inventory - Gross Profit Method
Assuming the following, calculate the estimated inventory
Gross profit on sales %
Beginning inventory June 1, $20,000
Net purchases ,000
Net sales at retail for June ,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)

18. Estimating Inventory - Gross Profit Method
Beginning Inventory, June 1, $20,000
Net purchases ,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 (Step 2)
Estimated cost of goods sold ,400
Estimated ending inventory, June 30, 2009 $19,600 (Step 3)

19. 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

20. Inventory Turnover
Net sales $32,000 Cost of goods sold $22,000
Beginning inventory at retail 11,000 Beginning inventory at cost ,500
Ending inventory at retail ,900 Ending inventory at cost ,600
Average inventory = Beginning inventory + Ending inventory 2
At retail = $32, = $32,000 = 3.22
$11,000 + $8, $9,950 2
Usually higher due to theft, spoilage, markdowns, etc.
At cost = $22, = $22,000 = 3.36
$7,500 + $5, $ 6,550 2

21. 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

22. 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 = 60%
10,000
Department B 3, ,000 = 30%
Department C 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

23. 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

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

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

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

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

28. Problem 18-27: Goods available for sale Beginning inventory $ 6,000
Net purchases ,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