ACCT10002 Lecture Notes - Lecture 4: Inventory Turnover, Gross Profit, Financial Statement

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amaranthbadger280

19 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT10002

Professor

Warren McKeown

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Introductory Financial Accounting

Lecture 4: Inventory

Inventory

Inventory are asset :

i. Held for sale in the ordinary course of business

ii. In the process of production for such sale; or

iii. In the form of materials or supplies to be consumed in the production process or rendering of

services.

Inventory vs. fixed assets:

Similar assets may be either Inventory or Fixed Assets depending on the nature of the entity’s business.

Inventory: for sale

Fixed assets: not for sale

Costs of inventory

Upon acquisition, inventory should be recorded at cost.

“The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs

incurred in bringing the inventories to their present location and condition.”

Costs of purchase comprises:

- the purchase price

- import duties and other taxes, and

- transport, handling and other costs directly attributable to the acquisition of finished goods,

materials and services.

Trade discounts, rebates and other similar items are deducted in determining the cost of purchase.

Freight costs or transport costs are added to the cost of inventory when it can be directly attributable to

one or more lines of inventory. When freight costs and inventory lines cannot easily be matched,

Management may decide to record these costs as an operating expense. However management may add

the Freight-in cost to the COS account to arrive at a Gross Profit calculation.

Merchandising operations

Merchandising businesses buy and resell inventory. Revenues are referred to as sales revenue and when

inventory is sold, the cost of the inventory sold is referred to as an expense (i.e. cost of sales).

Profit measurement process for a merchandising business.

Classifying inventory

Inventory can be classified into 3 categories:

1. Raw materials: materials that will be used but have not yet been placed in the production process

2. Work in progress: manufactured inventory that has been started but not yet completed in the

production process

3. Finished goods: completed manufactured items that are ready for sale

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Periodic Inventory System (Fiscal method)

- Inventory system in which detailed records are not maintained

- Cost of Sales is determined only at end of accounting period by a physical inventory count

- Used by some small businesses - no bar code facility. E.g. cafes and convenience stores.

- Revenue from sale of inventory is recorded when the sale is made

- Cost of Sales is not recorded at date of sale

- Quantity on hand and cost of sales are determined by a physical inventory count at the end of the

period

Key difference between periodic and perpetual inventory systems is the point at which the COS is

computed.

Operating cycles

2015Cost of Sales (COS):

To determine COS (periodic system):

1. Record purchases of inventory

2. Determine cost of goods purchased

3. Determine cost of goods on hand at beginning and end of accounting period - undertake a

physical inventory count

This method assumes that what has not been counted has been sold and represents the Cost of

Sales.

Determining the costs of goods purchased:

The following are the accounts used to record Purchases and Purchase Returns and Allowances

Net purchases = Purchases – Purchase returns and allowances

Cost of sales = Beginning inventory + cost of goods purchased (cost of goods available for sale) –

Ending inventory

Perpetual System

Inventory system in which cost of inventory and cost of sales is maintained on a continual basis. Computer

records will show the inventory which should be on hand at any time of the accounting period. The use of

barcodes and optical scanners have led to wide use of this method. (e.g. supermarkets and department

stores)

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Document Summary

Held for sale in the ordinary course of business. In the process of production for such sale; or. In the form of materials or supplies to be consumed in the production process or rendering of services. Similar assets may be either inventory or fixed assets depending on the nature of the entity"s business. Upon acquisition, inventory should be recorded at cost. The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of purchase comprises: the purchase price import duties and other taxes, and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the cost of purchase. Freight costs or transport costs are added to the cost of inventory when it can be directly attributable to one or more lines of inventory.

Related Questions

On April 12, after the close of business, Singh & Sons had a devastating fire that destroyed the companyâs work-in-process and finished-goods inventories. Fortunately, all raw materials escaped damage because materials owned by the firm were stored in another warehouse. The following information is available:


Sales revenue through April 12	$	340,000
Income before taxes through April 12		68,000
Direct labor through April 12		120,000
Cost of goods available for sale, April 12		285,000
Work-in-process inventory, January 1		21,000
Finished-goods inventory, January 1		35,000
Gross margin		30	% of sales

The firmâs accountants determined that the cost of direct materials used normally averages 25 percent of prime costs (i.e., direct material + direct labor). In addition, manufacturing overhead is 50 percent of the firmâs total production costs.

Required:

Singh & Sons is in the process of negotiating a settlement with its insurance company. Prepare an estimate of the cost of work-in-process and finished-goods inventories that were destroyed by the fire.


Cost of finished-goods inventory
Cost of work-in-process inventory

limesnake268

I need to Prepare entries for a job order, cost system, and cost of goods manufactured schedule, but my numbers aren't matching up. Please answer both parts of the question.

Case Inc. is a construction company specializing in custom patios. The patios are constructed of concrete, brick, fiberglass, and lumber, depending upon customer preference. On June 1, 2017, the general ledger for Case Inc. contains the following data.

P15-3A Prepare entries for a job order cost system and cost of goods manufactured schedule
Case Inc. is a construction company specializing in custom patios. The patios are constructed of
concrete, brick, fiberglass, and lumber, depending upon customer preference. On June 1, 2017,
the general ledger for Case Inc. contains the following data.

Raw Materials Inventory			$4,200		Manufacturing Overhead Applied		$32,640
Work in Process Inventory			$5,540		Manufacturing Overhead Incurred		$31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows.

	Job Cost Sheets
			Customer Job
	Cost Element		Rodgers		Stevens	Linton
	Direct materials		$600		$800	$900
	Direct labor		320		540	580
	Manufacturing overhead		400		675	725
			$1,320		$2,015	$2,205

During June, raw materials purchased on account were $4,900, and all wages were paid. Additional
overhead costs consisted of depreciation on equipment $900 and miscellaneous costs of $400 incurred
on account.
A summary of materials requisition slips and time tickets for June show the following.

	Customer Job		Materials Requisition slips		Time tickets
	Rodgers		$ 800		$850
	Koss		2,000		800
	Stevens		500		360
	Linton		1,300		1,200
	Rodgers		300		390
			4,900		3,600
	General use		1,500		1,200
			$ 6,400		$4,800

Overhead was charged to jobs at the same rate of $1.25 per dollar of direct labor cost. The patios for
customers Rodgers, Stevens, and Linton were completed during June and sold for a total of $18,900.
Each customer paid in full.

Instructions
(a)	Journalize the June transactions: (1) for purchase of raw materials, factory labor costs incurred,
	and manufacturing overhead costs incurred; (2) assignment of direct materials, labor, and overhead to
	production; and (3) completion of jobs and sale of goods.
(b)	Post the entries to Work in Process Inventory.
(c )	Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs.
(d)	Prepare a cost of goods manufactured schedule for June.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .



(a)(1)	Journalize the June transactions for purchase of raw materials, factory labor costs incurred,
	and manufacturing overhead costs incurred

	Raw Malerials Inventory
		Accounts Payable


	Factory Labor
		Cash


	Manufacturing Overhead
		Accumulated Depreciation- Equipment
		Accounts Payable


(a)(2)	Journalize the June transactions for assignment of direct materials, labor, and overhead to production

	Work in Pricess Inventory
	Manufacturing Overhead
		Raw Malerials Inventory


	Work in Pricess Inventory
	Manufacturing Overhead
		Factory Labor


	Work in Pricess Inventory
		Manufacturing Overhead


(a)(3)	Journalize the June transactions for completion of jobs and sale of goods.

	Finished Goods Inventory
		Work in Process Inventory


	Cash
		Sales


	Cost of Goods Sold
		Finished Goods Inventory


(b)	Post the entries to Work in Process Inventory.

	Work in Process Inventory
	6/1	Balance		June	Completed work
		Direct Materials
		Direct labor
		Overhead applied

	6/30	Balance


(c )	Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs.

	6/30 balance in Work in Process Inventory
	Unfinished Job (Koss)
	Direct materials
	Direct labor
	Manufacturing overhead



(d)	Prepare a cost of goods manufactured schedule for June.

	CASE INC.
	Cost of Goods Manufactured Schedule
	For the Month Ended June 30, 2017

	Work in process, June 1
	Direct materials used
	Direct labor
	Manufacturing overhead applied
	Total manufacturing costs
	Total cost of work in process
	Less: Work in process, June 30
	Cost of goods manufactured



After you have completed P15-3A, consider the following additional question.
1.	Assume that indirect labor and raw materials purchases changed to $1,400 and $6,800 respectively.
	Also assume that overhead is applied at the rate of $1.50 per dollar of direct labor. The three
	completed jobs were sold for $22,000 cash. Revise the journal entries to reflect these changes.

turquoisewater-buffalo175

Check My Work (2 remaining) eBook Problem-Solving StrategyBudgeted Income Statement and Supporting Budgets The budgetdirector of Gold Medal Athletic Co., with the assistance of thecontroller, treasurer, production manager, and sales manager, hasgathered the following data for use in developing the budgetedincome statement for March 2014: a.Estimated sales for March:b.Estimated inventories at March 1: c.Desired inventories at March31: d.Direct materials used in production: e.Anticipated cost ofpurchases and beginning and ending inventory of direct materials:f.Direct labor requirements: g.Estimated factory overhead costs forMarch: h.Estimated operating expenses for March: i.Estimated otherincome and expense for March: j.Estimated tax rate: 30% Required:1. Prepare a sales budget for March. Enter all amounts as positivenumbers. Gold Medal Athletic Co. Sales Budget For the Month EndingMarch 31, 2014 Unit Sales Volume Unit Selling Price Total SalesBatting helmet $ $ Football helmet Total revenue from sales $ 2.Prepare a production budget for March. Enter all amounts aspositive numbers. Gold Medal Athletic Co. Production Budget For theMonth Ending March 31, 2014 Units Batting helmet Football helmetExpected units to be sold Plus desired inventory, March 31, 2014Total Less estimated inventory, March 1, 2014 Total units to beproduced 3. Prepare a direct materials purchases budget for March.Enter all amounts as positive numbers. Gold Medal Athletic Co.Direct Materials Purchases Budget For the Month Ending March 31,2014 Plastic Foam Lining Total Units required for production:Batting helmet Football helmet Plus desired units of inventory,March 31, 2014 Total Less estimated units of inventory, March 1,2014 Total units to be purchased Unit price $ $ Total directmaterials to be purchased $ $ $ 4. Prepare a direct labor costbudget for March. Enter all amounts as positive numbers. Gold MedalAthletic Co. Direct Labor Cost Budget For the Month Ending March31, 2014 Molding Department Assembly Department Total Hoursrequired for production: Batting helmet Football helmet TotalHourly rate $ $ Total direct labor cost $ $ $ 5. Prepare a factoryoverhead cost budget for March. Enter all amounts as positivenumbers. Gold Medal Athletic Co. Factory Overhead Cost Budget Forthe Month Ending March 31, 2014 Indirect factory wages $Depreciation of plant and equipment Power and light Insurance andproperty tax Total $ 6. Prepare a cost of goods sold budget forMarch. Work in process at the beginning of March is estimated to be$15,300, and work in process at the end of March is desired to be$14,800. Enter all amounts as positive numbers. Gold Medal AthleticCo. Cost of Goods Sold Budget For the Month Ending March 31, 2014SelectDirect materials inventory, March 1, 2014Direct materialsinventory, March 31, 2014Direct materials purchasesFactoryOverheadFinished goods inventory, March 1, 2014Finished goodsinventory, March 31, 2014 SelectDirect materials inventory, March1, 2014Direct materials inventory, March 31, 2014Direct materialspurchasesFactory OverheadWork in process inventory, March 1,2014Work in process inventory, March 31, 2014 Direct materials:SelectDirect materials inventory, March 1, 2014Direct materialsinventory, March 31, 2014Finished goods inventory, March 1,2014Finished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014SelectDirect laborDirect materials purchasesFactoryoverheadFinished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014Cost of direct materials available for use SelectLess: Directmaterials inventory, March 1, 2014Less: Direct materials inventory,March 31, 2014Less: Finished goods inventory, March 1, 2014Less:Finished goods inventory, March 31, 2014Less: Work in processinventory, March 1, 2014Less: Work in process inventory, March 31,2014 Cost of direct materials placed in production SelectDirectlaborDirect materials purchasesFinished goods inventory, March 1,2014Finished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014SelectDirect materials purchasesFactory overheadFinished goodsinventory, March 1, 2014Finished goods inventory, March 31,2014Work in process inventory, March 1, 2014Work in processinventory, March 31, 2014 Total manufacturing costs Total work inprocess during the period SelectLess: Direct materials inventory,March 1, 2014Less: Direct materials inventory, March 31, 2014Less:Finished goods inventory, March 1, 2014Less: Finished goodsinventory, March 31, 2014Less: Work in process inventory, March 1,2014Less: Work in process inventory, March 31, 2014 Cost of goodsmanufactured Cost of finished goods available for sale SelectLess:Direct materials inventory, March 1, 2014Less: Direct materialsinventory, March 31, 2014Less: Finished goods inventory, March 1,2014Less: Finished goods inventory, March 31, 2014Less: Work inprocess inventory, March 1, 2014Less: Work in process inventory,March 31, 2014 Cost of goods sold 7. Prepare a selling andadministrative expenses budget for March. Enter all amounts aspositive numbers. Gold Medal Athletic Co. Selling andAdministrative Expenses Budget For the Month Ending March 31, 2014Selling expenses: Sales salaries expense Advertising expenseTelephone expenseâselling Travel expenseâselling Total sellingexpenses Administrative expenses: Office salaries expenseDepreciation expenseâoffice equipment Telephoneexpenseâadministrative Office supplies expense Miscellaneousadministrative expense Total administrative expenses Totaloperating expenses 8. Prepare a budgeted income statement forMarch. Enter all amounts as positive numbers. Gold Medal AthleticCo. Budgeted Income Statement For the Month Ending March 31, 2014SelectGross profitIncome before income taxInterest expenseInterestrevenueRevenue from sales SelectAdministrative expensesCost ofgoods soldIncome tax expenseInterest expenseSelling expensesSelectGross profitInterest revenueNet incomeNet lossRevenue fromsales Operating expenses: SelectCost of goods soldInterestrevenueNet incomeNet lossSelling expenses SelectAdministrativeexpensesGross profitInterest revenueNet incomeNet loss Totaloperating expenses Income from operations Other income: SelectGrossprofitInterest expenseInterest revenueNet incomeRevenue from salesOther expenses: SelectCost of goods soldGross profitInterestexpenseInterest revenueNet loss Income before income tax SelectCostof goods soldGross profitIncome tax expense (30% rate)InterestrevenueNet loss Net income

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ACCT10002 Lecture Notes - Lecture 4: Inventory Turnover, Gross Profit, Financial Statement

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