Example of Using the Actual Cost Method

This example illustrates how the cost processor uses the actual cost method to cost: inventory receipts, cost of goods sold, and the value of beginning and ending inventory.

Scenario

A restaurant business receives two shipments of raw material for a total of 25 units, and a sales order of 12 units. The unit is defined as a sandwich, and the raw material is defined as sandwich food ingredients.

Transaction Details

The business needs to calculate:

• Overhead absorption on the two receipts.

• The value of beginning and ending inventory, including raw materials and overhead absorption.

• Cost of good sold.

Analysis

Following are the details for two receipts of raw materials:

Receipt ID	Inventory Value
Receipt #1	10 * $10 = $100
Receipt #2	15 * $12 = $180

The cost processor calculates overhead absorption for the two receipts as follows:

Receipt ID	Overhead Absorption
Receipt #1	Labor: $5 Facility: $3
Receipt #2	Labor: $8 Facility: $7

Resulting Accounting Distributions

The distribution processor generates the following accounting entries:

Event	Accounting Entry
Receipt #1: 10 units raw material	Dr Inventory-Raw Material $100 Cr Receiving $100
Receipt #1: overhead	Dr Inventory-Labor $5 Dr Inventory-Facility $3 Cr Overhead Absorption $8
Receipt #2: 15 units raw material	Dr Inventory-Raw Material $180 Cr Receiving $180
Receipt #2: overhead	Dr Inventory-Labor $8 Dr Inventory-Facility $7 Dr Overhead Absorption $15
COGS for 12 units (10 * $108/10) + (2 * $195/15)	Dr COGS $134 Cr Inventory $134

The beginning inventory is 25 units valued at: 10 * $10.8 + 15 * $13 = $303.

The ending inventory is 13 units valued at: 13 * $13 = $169.