18-1
Chapter 18
Inventory and Overhead
18-2 McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
#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
18-3
#18
Inventory and Overhead
Learning Unit Objectives
LU18.2
18-4
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
18-5
Periodic Inventory System Relies on a physical count of
inventory done periodically
Jay Company - Inventory Information
Beginning Inventory
First Purchase (Jan 15)
Second Purchase (Feb. 24)
Third Purchase (Apr. 17)
Fourth Purchase (Aug. 24)
Goods available for sale
Units Sold
Units in ending inventory
Number of
Cost
Total
Units Purchased
50
30
40
per unit
$13
12
10
180
8
cost
$650
360
400
20
9
20
160
108
52
Step 1
18-6
160
$1,750
Specific Identification Method
Beg
Inv.
1/15
2/24
4/17
8/24
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)
18-7
Specific Identification Method
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
$508
Cost of goods
available for sale
Cost of ending = Cost of
inventory
goods sold
Step 3
$1,750 - $508 = $1,242
18-8
Step 2
Weighted-Average Method
Beg
Inv.
1/15
2/24
4/17
8/24
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
18-9
Weighted Average Method
Beginning inventory
First purchase (Jan 15)
Number of
Cost
Total
Units Purchased
50
30
per unit
$13
12
cost
$650
360
Second purchase (Feb. 24)
Third purchase (Apr. 17)
Fourth purchase (Aug. 24)
Goods available for sale
Units sold
40
20
20
160
108
Units in ending inventory
52
10
9
8
400
180
160
$1,750
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
18-10
First-In, First-Out Method
Beg
Inv.
1/15
2/24
4/17
8/24
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
18-11
First-In, First-Out Method
FIFO (Bottom Up)
Number of
Cost
Total
Beginning Inventory
units purchased
50
per unit
$13
cost
$650
First Purchase (Jan 15)
Second Purchase (Feb. 24)
Third Purchase (Apr. 17)
Fourth Purchase (Aug. 24)
Goods available for sale
30
40
20
20
160
Units Sold
Units in ending inventory
108
52
12
10
9
8
360
400
180
160
$1,750
20 Units from Aug. 24 at $8
20 Units from Apr. 17 at $9
12 Units from Feb. 24 at $10
$160
180
120
Cost of goods sold:
52 units in ending inventory
$460
$1,290
18-12
$1,750 - $460 =
Last-In, First-Out Method
Beg
Inv.
1/15
2/24
4/17
8/24
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
18-13
Last-In, First-Out Method
LIFO (Top Down)
Number of
Cost
Units Purchased
per unit
cost
$13
12
10
9
8
$650
360
400
180
160
Beginning Inventory
First Purchase (Jan 15)
Second Purchase (Feb. 24)
Third Purchase (Apr. 17)
Fourth Purchase (Aug. 24)
50
30
40
20
20
Goods available for sale
Units Sold
Units in ending inventory
160
108
52
Total
$1,750
50 Units from beginning inventory at $13 $650
2 Units from Jan/ 15 at $12
24
Cost of goods sold:
52 units in ending inventory
$1,076
18-14
$674
$1,750 - $674 =
Summary
Inventory
method
Specific Id.
Cost of Goods
available for sale
$
1,750
Cost of ending
inventory
10 x $12 = $120
16 x $10 = 160
20 x $ 9 = 180
6 x $ 8 = 48
$ 508
Cost of goods
sold
$1,750 - $508 = $1,242
$1,750
160
= $10.9375
$10.9375 x 52 = $568.75
Weighted Avg. $
FIFO
LIFO
18-15
$
$
1,750
1,750
1,750
$1,750 - $568.75 = $1181.25
Bottom up to inventory
level (52)
20 x $8 = $160
20 x $9 = 180
12 x $10= 120
$460
Top down to inventory
level (52)
50 x $13 = $650
2 x $12 = 24
$674
$1,750 - $460 = $1,290
$1,750 - $674 = $1,076
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
18-16
Estimating Inventory - Retail Method
Beginning Inventory
Net purchases during month
Cost of goods available for sale (Step 1)
Cost
Retail
$2,000
$3,800
1,000
1,200
$3,000
$5,000
Less net sales for month
Ending Inventory at retail
3,100
(Step 3) $1,900
Cost ratio ($3,000/$5,000) (Step 2)
Ending Inventory at cost ($1,900 x .60) (Step 4)
18-17
60%
$1,140
Estimating Inventory - Gross Profit Method
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
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)
18-18
Estimating Inventory - Gross Profit Method
Beginning Inventory, June 1, 2006
Net purchases
Cost of goods available for sale (Step 1)
$20,000
8,000
$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)
18-19
Inventory Turnover
The number of times inventory is replaced during a specific time
18-20
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
Ending inventory at cost
5,600
8,900
Average inventory = Beginning inventory + Ending inventory
2
At retail =
At cost =
18-21
$32,000
= $32,000 = 3.22
$11,000 + $8,900
$9,950
2
$22,000
= $22,000 = 3.36
$7,500 + $5,600
$ 6,550
2
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
18-22
Calculating the Distribution of Overhead
by Floor Space
Department A
Department C
- 2,500 square feet
- 2,000 square feet
Department B - 5,500 square feet
Overhead of $100,000
Floor space
Department A
2,500
Department B
5,500
Department C
2,000
Department A
Department B
Department C
18-23
Ratio
2,500 = 25%
10,000
5,500 = 55%
10,000
2,000 = 20%
10,000
.25 x $100,000 = $25,000
.55 x $100,000 = $55,000
.20 x $100,000 = $20,000
Step 1 &
2
Calculating the Distribution
of Overhead by Sales
Department A
Department B
Department A
Department B
Sales
$150,000
50,000
$200,000
Ratio
$150,000 = .75
$200,000
$50,000 = .25
$200,000
.75 x $50,000 = $37,500
.25 x $50,000 = $12,500
Total
Overhead
Expenses
Step 3. Multiply the total sales in all departments
Step 2. Calculate the ratio for each department based on sales
Step 1. Calculate the total sales in all departments
18-24