Norland Upholstery Case Study

Assignment 2: Calculating Inventory
Finland Upholstery Inc.
Oscar L. Galvan
Argosy University

The firm's selling and administrative expenses are operating expenses; therefore they are treated as Period Cost rather that Product Cost. This type of cost is unrelated to manufacturing overhead and cost of goods sold. | Manufacturing Overhead:Manufacturing overhead includes all costs of manufacturing such as indirect material, indirect labor, property taxes, maintenance and repairs, insurance etc. It excludes the direct material and direct labor. The selling and administrative expenses will not be reported in the manufacturing overhead since they are not incurred for the production of the goods. | Cost of Goods Sold: |
Cost of goods sold
is a cost incurred to obtain the raw material for the production and for producing the products that are sold to the consumers.
Cost of goods sold: (Beginning merchandise inventory + inventory purchases - ending inventory.)
Since the selling and administrative expenses are not incurred for obtaining the raw material as well as manufacturing the product they will not be reported in the cost of goods sold.
Selling and Administrative Expenses:
The selling and administrative expenses are incurred for delivering the goods to the consumers, and also for the advertising of the products. The following are examples; management expenses, salesman salaries, clerical expenses and advertisement expenses.

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1. Calculate the company’s predetermined overhead application rate. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Budgeted Overhead | 5,460,000 | | | | | | | | | | | | | | | | Budgeted Direct Labor | 4,200,000 | | | | | | | | | | | | | | | | Predetermined Overhead Rate | 130% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2. Calculate the additions to the work-in-process inventory account for the direct material used, direct labor and manufacturing overhead. | | | | | | | |
| | | | | | | | | | | | | | | | | | | Direct Material used | 5,600,000 | | | | | | | | | | | | | | | | Direct Labor | 4,350,000 | | | | | | | | | | | | | | | | Manufacturing overhead | 5,655,000 | | | | | | | | | | | | | | | | Total Addition | 15,605,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3. Calculate the finished-goods inventory for the 12/31/01 balance sheet. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Direct material cost | 156,000 | | | | | | | | | | | | | | | | Direct labor | 85,000 | | | | | | | | | | | | | | | | Manufacturing overhead | 110,500 | | | | | | | | | | | | | | | | Finished goods inventory | 351,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All amounts in the Work-in-Process must be transferred to Finished-Goods-Inventory due to the fact that there is no Work-in-Process at year end. Therefore: | | | | | | | | | | | | | | | | | | | | | | | | | | Dr. | Cr. | | | | | | | | | | | | | | | Finished goods inventory | 5,811,800 | | | | | | | | | | | | | | | | Work in process Inventory | | 5,811,800 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.Calculate the over-applied/under-applied overhead at year end | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Applied overhead | 5,655,000.00 | | | | | | | | | | | | | | | | Actual overhead | 5,554,000.00 | | | | | | | | | | | | | | | | Over-applied overhead | 101,000.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Calculation of Actual Overhead: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Indirect materials 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 | | | | | | | | | | | | | | | | Total | 5,554,000.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Dr.
| Cr. | | | | | | | | | | | | | | | Manufacturing Overhead | $5,554,000 | | | | | | | | | | | | | | | | Cost of Goods Sold | | $5,554,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5.Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category. | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Company’s cost of goods sold totals $15,309,300 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finished-goods inventory, Jan 1 | 0.00 | | | | | | | | | | | | | | | | Add: Cost of goods manufactured | 15,761,800.00 | | | | | | | | | | | | | | | | Cost of goods available for sale | $15,761,800.00 | | | | | | | | | | | | | | | | Less: Finished-goods inventory, Dec. 31 | 351,500.00 | | | | | | | | | | | | | | | | Unadjusted cost of goods sold | 15,410,300.00 | | | | | | | | | | | | | | | | Less: Over applied overhead | 101,000.00 | | | | | | | | | | | | | | | | Cost of goods sold | $15,309,300.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The firm's selling and administrative expenses are operating expenses; therefore they are treated as Period Cost rather that Product Cost. This type of cost is unrelated to manufacturing overhead and cost of goods sold. |