Ending Finished Goods Inventory Budget

06/04/2011 13:47

 

Ending Finished Goods Inventory Budget:

Learning Objective of the article:

  1. Define and explain ending finished goods inventory budget.
  2. Prepare a manufacturing overhead budget.

After preparing sales budget, production budget, direct materials budget, direct labor budget, and manufacturing overhead budget the management has all the data needed to calculate unit product cost. This calculation is needed for two reasons: first, to determine cost of goods sold on the budgeted income statement; and second, to know what amount to put on the balance sheet inventory account for unsold units. The carrying cost  of unsold units is calculated on the ending inventory finished goods budget.

Example:

The unit product cost calculations for Hampton Freeze Inc. are shown below: (see explanation)

 

Hampton Freeze Inc.
Ending Finished Goods Inventory Budget
Absorption Costing Bases
For the Year Ended December 31, 2009

Item

Quantity Cost Total
Production Cost Per Case:      
Direct materials 15 Pounds $0.20 per pound $3.00
Direct labor 0.40 hours 15.00 per hour 6.00
Manufacturing overhead 0.40 hours 10.00 per hour 4.00
      ---------
Unit product cost     $13.00
      ======
Budgeted finished goods inventory:      
Ending finished goods inventory (see production budget)     3,000
Unit production cost (see above)     $13.00
      -----------
Ending finished goods inventory in dollars     $39.00
      ======

Explanation of Ending Finished Goods Inventory Budget for Hampton Freeze Inc.

For Hampton Freeze Inc. the absorption costing unit product cost is $13 per case of popsicles (finished goods of Hampton Freeze Inc.)--costing of $3 of direct materials, $6 of direct labor, and $4 of manufacturing overhead. The manufacturing overhead is applied to units of product on the basis of direct labor-hours at the rate of $10 per direct labor-hour. The budgeted carrying cost of the expected inventory is $39,000.